Tag: case within a case

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.

 

Brannen v. Siefert: A (Legal Malpractice) Case Study (Ill. First Dist.)

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The Featured Case: Brannen v. Siefert, 2013 IL App (1st) 122067, ¶ 52 (11.19.13)

 

The Facts: Plaintiffs – a land trustee and trust beneficiary – sued the Underlying Defendants, an attorney and his wife, for breach of a written real estate contract for the purchase of a home owned by the plaintiffs.  The strangely worded contract, drafted by Underlying Defendants, called for staggered payments of interest and principle over a several-year period to be credited towards the home’s purchase price.

The Underlying Defendants quickly breached and plaintiffs hired an attorney (the Former Attorneys) to collect the amounts owed under the contract.

The Former Attorneys (a solo practitioner and his professional corporation), unbeknownst to plaintiffs, declared a forfeiture of the contract by written notice to Underlying Defendants.  Several months later, the Underlying Defendants moved out.  At the time they vacated the property, the Underlying Defendants owed plaintiff about $150,000 and hadn’t made any payments for over two years.

The Underlying Case

Displeased with Former Attorneys’ performance, plaintiffs hired substitute counsel who filed a breach of contract suit against Underlying Defendants to recover past and future payments owed under the real estate contract.  The Underlying Defendants successfully moved to dismiss the lawsuit based on the Former Attorneys prior forfeiture notice.  The court found that the Underlying Defendants’ forfeiture remedy foreclosed a damages action by the plaintiffs.  The plaintiffs then sued the Former Attorneys for legal malpractice.

The Malpractice Suit

The thrust of plaintiff’s malpractice suit was that the Former Attorneys committed professional negligence by giving up plaintiffs’ contract rights without first consulting them and by failing to explain the legal effect of that remedial choice.  The Former Attorneys argued they did explain how a forfeiture would impact plaintiffs’ rights and that cancelling the contract was the proper remedy since plaintiffs’ primary goal was to retake the property; not recover damages.

After a trial, a jury entered judgment against the Former Attorneys for $199,500 and they appealed.

Held: Affirmed.  

Rules/Reasoning:

In Illinois, a legal malpractice plaintiff must establish: (1) an attorney owed the plaintiff’s a duty arising from the attorney-client relationship; (2) the attorney breached that duty; (3) the attorney’s breach of duty proximately caused actual damages to the plaintiff.  Expert testimony is usually required to prove that an attorney breached his professional duties to his client.  ¶ 45, 61. 

A legal malpractice plaintiff must prove not only that he would have won the underlying case but that the underlying defendant was solvent enough to pay a judgment.  But the required solvency showing isn’t stringent: the plaintiff doesn’t have to prove a  defendant’s net worth but only needs to show the defendant’s ability to at least partially pay a judgment. ¶ 63.

The jury found the plaintiffs’ expert more believable than the Former Attorneys’.  Plaintiffs’ expert testified that contractual forfeiture was the wrong remedy since under the Illinois Forcible Entry and Detainer Act (the “Forcible Act”) a contract seller like plaintiffs can sue for both possession and money damages.  735 ILCS 5/9-102(a)(5), 9-209 (plaintiff can sue for possession and damages).  The plaintiffs’ expert also testified that by declaring a forfeiture – when both Illinois law and the subject real estate contract allowed multiple remedies – the Former Attorneys prevented the plaintiffs from recovering nearly $150,000 in money damages.  ¶¶ 46-49.

The Court also found that plaintiffs established the Underlying Defendants’ solvency.  The trial evidence demonstrated that the Underlying Defendants could at least partially pay a judgment based on their income and other assets.  ¶ 65.  Because the plaintiffs proved each element of their legal malpractice case, the First District affirmed the jury verdict for the plaintiffs.

Take-aways: (1) To win the legal malpractice ‘case within the case’, a malpractice plaintiff must prove he would have won the underlying case but doesn’t have to precisely prove the malpractice defendant’s net worth. It is enough to show that the defendant has a source of income and is able of paying all or part of a judgment; (2) The Forcible Act provides for possession and money damages to a contract home seller where a buyer breaches an installment sales contract; and (3) the forfeiture remedy should be exercised with extreme caution.  That’s because if you nullify a contract, it can bar a later action to recover money damages for breach of contract.