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).

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 its individual capacity.

The plaintiffs’ central claim was that McGuirreWoods (MW) botched the underlying case by not timely suing Sidley Austin, LLP (Sidley), the LLC’s erstwhile counsel, in the wake of the LLC’s majority shareholders looting the company.  Sidley got the underlying case tossed on statute of limitations grounds and because the plaintiffs lacked standing.

The trial court found that even if MW had timely sued Sidley, the shareholder plaintiffs still lacked standing as their 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.

Affirming judgment for Sidley, the Illinois Supreme Court considered the interplay between legal malpractice cases and shareholder derivative suits.

Dubbed a “case-within-a-case,” the legal malpractice claim plaintiff alleges that if it wasn’t for an attorney’s negligence in an underlying case, the plaintiff would have won that case and been awarded money damages.

The legal malpractice plaintiff must prove (1) the defendant attorney owed the plaintiff a duty of care arising from the attorney-client relationship, (2) the defendant attorney (or law firm) 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’s negligence, the legal malpractice suit fails.

The plaintiff must establish it would have won the underlying lawsuit but for the lawyer’s negligence.  The plaintiff’s recoverable damages in the legal malpractice case are the damages it would have recovered in the underlying case. [¶ 12]

Here, the plaintiffs sued as individual shareholders.  The problem was that Sidley’s obligation ran to the LLC entity.  As a result, the plaintiffs lacked individual standing to sue Sidley.

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 rule by providing that any derivative action recovery goes to the LLC; not the individual shareholder.  The individual shareholder plaintiff can recover his attorneys’ fees and expenses.  805 ILCS 180/40-15.

While a successful derivative suit plaintiff can benefit indirectly from an increase in share value, the Court held that missing out on increased share value was not something the shareholders 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.  And since the plaintiffs could not have recovered money damages against Sidley in the earlier lawsuit, they could not recover them in a later malpractice case.

Afterwords:

This case provides a thorough explication of the standing doctrine in the context of shareholder derivative 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.

 

Contractor’s Legal Malpractice Suit Can Go Forward In Case of (Alleged) Misfiled Mechanics’ Lien: IL 1st Dist.

Construction Systems, Inc. v. FagelHaber LLC, 2015 IL App (1st) 141700, dramatically illustrates the perilous consequences that can flow from a construction contract’s failure to identify the contracting parties and shows the importance of clarity when drafting releases intended to protect parties from future liability.

The plaintiff contractor sued its former law firm (the Firm) for failing to properly perfect a mechanics lien against a mortgage lender on commercial property.  The plaintiff alleged that because of the Firm’s lien perfection failure, the plaintiff was forced to settled its claim for about $1.3M less than the lien’s worth (about $3M). 

In the underlying lien case, the plaintiff and defendant Firm got into a fee dispute and the Firm withdrew.  The Firm turned over its file to the plaintiff after the plaintiff made a partial payment of the outstanding fees (owed to defendant Firm) and signed a release (the “Release”). The Release, which referenced “known and unknown” claims and contained “without limitation” verbiage, was signed by the plaintiff in 2004.  Plaintiff filed the current malpractice suit in 2009.

The trial court entered summary judgment for the Firm on the basis that the Release immunized the Firm from future claims.  Plaintiff appealed.

Held: Reversed

Rules/Reasons:

Reversing summary judgment for the Firm, the First District first applied the relevant rules governing written releases in Illinois.

a release is a contract and is governed by contract law;

– a release will be enforced as written where it’s clearly worded

– the scope and effect of a release is controlled by the intention of the parties;

– the intention of the parties is divined by reference to the words of the release and a release won’t be construed to defeat a claim that was not contemplated by the parties when they signed it;

– A “general” release will not apply to specific claims where a party is unaware of other (specific) claims;

– Where one party to a release owes the other a fiduciary duty (e.g. lawyer-client), the party owing the fiduciary duty has the burden of showing that it disclosed all relevant information to the other party.

(¶¶ 25-28).

Here, the court gave the Release a cramped construction.  It held that it didn’t apply to the malpractice suit since that case wasn’t filed until 5 years after the Release was signed and there was no evidence that the plaintiff knew that the Firm possibly flubbed the lien filing when it (the plaintiff) signed the Release.  This lack of evidence on the parties’ intent raised a disputed fact question that required denial of summary judgment.

Next, the court turned to the Firm’s judicial estoppel argument – that the plaintiff couldn’t sue for malpractice since it obtained a benefit in the underlying lawsuit (a settlement payment of $1.8M from the competing lender) by claiming it was an original contractor and not a subcontractor.  Judicial estoppel applies where (1) a party takes two positions under oath, (2) in separate legal proceedings, (3) the party successfully maintained the first position and obtained a benefit from it; and (4) the two positions are inconsistent.  (¶ 37).

The issue was paramount to the underlying lien case because if the plaintiff was a subcontractor, it had to comply with the 90-day notice requirement of Section 24 of the Lien Act.  But if it was a general or original contractor, plaintiff was excused from the 90-day notice requirement.  Based on this factual uncertainty, the court found the plaintiff had a right to pursue alternative arguments to salvage something of its approximately $3M lien claim.

The court also agreed with the plaintiff that it could recover prejudgment interest on the legal malpractice claim.  Since that claim flowed from the underlying allegation that the Firm failed to perfect plaintiff’s lien, and since Section 21 of the Illinois Mechanics Lien Act allows for prejudgment interest (770 ILCS 60/21), the plaintiff could add the interest it would have recovered to the damage claim versus the Firm. (¶ 48).

Afterwords:

1/ A broad release can still be narrowly interpreted to encompass only those claims that were likely in the release parties’ contemplation.  If a claim hadn’t come to fruition at the time a release is signed, the releasing party can argue that an expansive release doesn’t cover that inchoate claim;

2/ Judicial estoppel requires more than alternative pleadings or arguments.  Instead, the litigant must take two wholly contradictory statements and obtain a benefit from doing so.  What’s a “benefit” is open to interpretation.  Here, the plaintiff received $1.8M on its lien claim in the earlier litigation.  Still, this wasn’t a benefit in relation to the value of its lien – which exceeded $3M;

3/ If the underlying claim – be it common law or statutory – provides for pre-judgment interest, then the later malpractice suit stemming from that underlying claim can include pre-judgment interest in the damages calculation.