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.

Settlement Agreement Construed Like Any Other Contract

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This one naturally resonated with me as I’ve experienced how time-consuming and expensive it is to monitor and enforce a settlement agreement that, in theory, ended the case.

In Sprint Nextel v. AU Electronics, Inc., 2014 WL 2580, the parties executed a written settlement agreement ending litigation involving defendants’ illegal sale of Sprint cell phones.  The agreement required the defendants to make several installment payments in exchange for Sprint dismissing the suit and not enforcing the agreement’s consent judgment term.

A month after the settlement agreement was signed, government agents raided defendants’ corporate offices (as part of a crackdown on cell phone trafficking), took its equipment and slapped a $1,000,000 lien on the corporate bank account.  Convinced that Sprint was behind the raid, the defendants repudiated the settlement agreement and Sprint moved to enforce it.  The Illinois Northern District granted Sprint’s motion.

The Court enforced the settlement agreement under basic contract interpretation rules.

A district court has inherent power to enforce a settlement agreement in a case before it;

–  A settlement agreement is a contract and state contract law governs the construction and enforcement of a settlement agreement;

– The terms of a settlement are based on the parties’ intent derived from the objective language of the agreement terms;

– A settlement agreement is effective when arrived at unless the parties specify that it’s subject to contingencies.

– A binding contract must contain an offer, acceptance and consideration and a meeting of the minds on all material term;

– Consideration means “bargained-for exchange” – where the promisor receives a benefit in exchange for his promise;

A “meeting of the minds” is based on the parties’ objective manifestations of intent;

–  A “material term” is one so essential to the contract that it wouldn’t have been made without itSprint, *4-5.

Here, all contract elements were present: the settlement agreement clearly delineated the parties obligations, it recited consideration and was signed by the defendants.  Consideration existed too:  Sprint agreed to dismiss the suit and forbear from executing on the judgment as long as defendants made the payments.  Sprint also established defendants’ breach (the repudiation of the settlement) and damages – defendants’ refusal to comply with the settlement meant that Sprint would now have to spend more time and money litigating the case and would not receive the installment payments.

The defendants’ tried to defeat the settlement agreement under rescission and commercial frustration theories.  The Court rejected both arguments.  Defendants’ rescission attempt was based on Sprint’s supposed breached of the agreement’s confidentiality/non-disclosure provisions.  The Court nixed this argument because the non-disclosure provision wasn’t a material term of the settlement agreement.

Under Illinois law, only a material breach will merit rescinding a contract.  Sprint, *9.  Here the material terms were simple: (a) Sprint dismisses the suit; and (b) defendants make payments.  The non-disclosure term was viewed as collateral to the agreement’s main purpose.

The Court also rejected defendants’ commercial frustration defense.  A sparingly used doctrine, a commercial frustration defense requires a showing that (1) the frustrating event was not reasonably foreseeable, and (2) the value of counter-performance has been totally or nearly totally lost or destroyed by the frustrating event.

The Court labeled the commercial frustration test as “rigorous” and “demanding.”  The Court held that the government’s raid on the corporate defendant’s office was reasonably foreseeable given that defendants were involved in a criminal enterprise and under investigation by state and Federal authorities.  Also, the defendants’ performance of the settlement terms wasn’t completely foreclosed.  The individual defendants’ bank accounts were not frozen by the government.  This made it possible for defendants to perform under the settlement agreement by paying the installments to Sprint.

Afterword: Monitoring compliance with and enforcing settlement agreements often leads to protracted, “satellite” litigation.  It can be tedious and demoralizing to realize that you are spending more energy (and money) babysitting and litigating the settlement than you did in the underlying case!  The Sprint case, in back-to-basics fashion, shows that settlement agreements are enforced like any other contract.

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How to Enforce Settlement Agreements In Federal Court

I once represented a plaintiff in a Federal question case (based on the Computer Fraud and Abuse Act) that settled with the defendant making installment payments over time.  In the settlement agreement, I took great pains to emphasize that if the defendant missed a payment, I could immediately move to reinstate the case and accelerate the settlement amount plus fees and costs.  For good measure, I provided that the court retains jurisdiction to enforce the settlement terms if the defendant defaulted.  I thought I was doubly protected.  Defendant’s counsel signed off on all the terms.

We then entered a stipulation to dismiss.  The court dismissed the suit with prejudice.  I remember feeling vaguely uneasy about the “with prejudice” language but quickly reminded myself that (a) dismissals with prejudice AND with the court retaining jurisdiction (seemingly an oxymoron) are entered all the time in State court and (b) the defendant’s counsel requested the with prejudice language as an inducement for getting his client to agree.  After a ton of time and money on this case, both sides were anxious to put this one to bed.

Fast forward about 4 months into an 18-month payment arrangement and the defendant defaulted and my demand letter for compliance went unanswered.  I quickly filed a motion to vacate the dismissal, to reinstate and enter judgment for the full settlement amount – just as the settlement agreement allowed me to.  Imagine my shock when the court denied my motion?!  Apparently, the “with prejudice” language has teeth.

I then filed a motion to vacate the dismissal under FRCP 60 – the rule that governs motions to vacate judgments on the basis of mistake, fraud, inadvertence or other reasons “that justify relief.”  The Court denied this motion too. My only remedy was to now file a breach of contract action in State Court for breach of the settlement agreement (the contract).  While we were able to recover some additional payments from the defendant after we filed in state court (before the defendant filed for bankruptcy protection), I had to consider the question of what I could have done differently?

Key Settlement Enforceability Rules

Federal courts don’t like to babysit settlement agreements (who knew?!).  Seventh Circuit caselaw provides that when a case is dismissed pursuant to a stipulation to dismiss, the court does not automatically acquire jurisdiction over disputes arising out of an agreement that produces the stipulation.  Kokkonen v. Guardian Life Ins. Co. v. Am., 511 U.S. 375, 378 (1994); McCall-Bey v. Franzen, 777 F.2d 1178, 1188 (7th Cir. 1985)(rejecting suggestion that federal judges have inherent power to enforce settlement agreements arising from lawsuits that were previously before them). 

An important rule in the 7th Circuit is that “[a] settlement agreement, unless it is embodied in a consent decree or some other judicial order or unless jurisdiction to enforce the agreement is retained (meaning that the suit has not been dismissed with prejudice), is enforced just like any other contract.”  Lynch, Inc. v. SamataMason, Inc., 279 F.3d 487, 489 (7th Cir. 2002). 

The 7th Circuit holds that a district judge can’t dismiss a suit with prejudice and at the same time retain jurisdiction to enforce the settlement agreement: it’s a contradiction in terms.  A signed stipulation of dismissal does not vest the Court with jurisdiction over an ancillary contract dispute just because the parties included retention of jurisdiction language in the stipulation.   Parties cannot confer federal jurisdiction by agreementLynch, 279 F.3d at 489. 

What About FRCP 60?

I was also surprised that my Rule 60 motion to vacate motion was denied.  But, it turns out the standard for Rule 60 relief is high.  Like life-and-death high.  In Nelson v. Napolitano, 657 F.3d 586, 589 (7th Cir. 2011), the Court held that there may be “some instances” where a Federal court will vacate a voluntary dismissal on plaintiff’s motion, but it would have to be on the order of “a defendant faking his own death with a fraudulent death certificate in order to induce a plaintiff to voluntarily dismiss.”

The take-away:

In dismissing an action in Federal Court (at least in the 7th Circuit), it’s a bad idea to put “with prejudice” language in a dismissal order or stipulation if you want to be able to reopen the case at a later date (such as where a defendant misses an installment payment). 

Even better, try to put the settlement payment terms in the dismissal order.  This will increase your chances of getting the court to enforce a settlement if the defendant defaults. 

If you can’t reinstate a case because of prior “with prejudice” language, then file a new suit for breach of contract (for breach of settlement agreement) in state court.