Tag: Rocco

Fee Shifting – Is ‘Prevailing Party’ Language Required?

I see this often: plaintiff sues a defendant for breach of contract.  The defendant has more financial resources than the plaintiff and the contract doesn’t have an attorneys’ fees provision.  Meaning, each side is responsible for its own fees. 

After several months, the plaintiff gets financially (and mentally) worn down by the richer defendant – who by now has filed numerous counterclaims and scheduled a flurry of witness depositions. 

The plaintiff says “uncle” and the parties enter the dreaded Mutual Walk-Away.  The plaintiff gets nothing, is annoyed at her lawyer (whom she has been paying hourly) and loses confidence in the litigation system. 

Once again, the deeper-pocketed defendant gets its way and the plaintiff, whose claim had merit, never gets her day in court.

One way to protect against this  common occurrence is to insert an attorneys’ fees or “fee-shifting” provision in the contract. 

Fee language can at least make a defendant think twice about trying to break a plaintiff’s will through protracted litigation.  It also encourages the plaintiff to not give up so easily when there is a potential fees and costs recovery at the end of the lawsuit. 

In Bank of America v. Oberman, Tivoli & Pickert, Inc., 2014 WL 293662,  an accounting firm sued a commercial lender for breach of a commercial loan agreement.  The agreement contained fee-shifting language applicable to the “collection, enforcement, administration, or protection” of the loan agreement. 

After plaintiff’s Illinois suit was dismissed for the fourth time and the dismissal was affirmed on appeal, the lender filed a separate action to recover its defense fees.

The accounting firm moved to dismiss the lender’s claim on the basis that the loan documents  didn’t specify that the prevailing party could recover attorneys’ fees.  The Northern District denied the motion.

Reasoning:

– The general rule in Illinois is that the lawsuit winner isn’t entitled to recover its attorneys’ fees unless there is a contractual provision that says so;

– Allowing a losing party to collect attorneys’ fees from the successful party violates Illinois public policy;

– A fee provision doesn’t have to contain the magic words “prevailing party” to be enforceable.

*4-5.

The Northern District found the fee-shifting language applied to the lender’s defense of the accounting firm’s various lawsuits.  The loan contract specifically said that fees incurred in the “protection” of the loan agreement were recoverable. 

The Court applied the Black’s Law Dictionary definition of protection (“to defend from danger or injury”) in ruling that defending a lawsuit equated to protecting the lender’s contract rights.  

Afterword:

To avoid the negative aftershocks of the above walk-away scenario, I always stress to clients that their contracts should contain attorneys’ fees language.  I also caution them that when signing another party’s contract, to be alert for attorneys’ fees language slanted in the other side’s favor. 

This case illustrates that while “prevailing party” terminology isn’t required to enforce a fee-shifting clause; the clearer and broader the clause, the better. 

 

 

Medical Practice Break-Up Spawns Non-Compete Dispute

imageThe bitter breakup of a medical practice provides the setting for the Illinois Fifth District to consider the scope of a non-compete clause and how it impacts a minority shareholder’s buy-out rights.

Gingrich v. Midkiff, 2014 IL App (5th) 120332-U presents a dispute between two former partners in a medical corporation.  At the medical practice’s inception – in the late 1990s – the parties signed a stock purchase agreement that contained a 5-year/20-mile non-compete provision (the “Non-Compete”).

The Non-Compete only applied in two situations: (1) if a shareholder withdrew from the practice after giving the required written notice; or (2) where a shareholder was expelled from the practice.  The parties’ relationship quickly soured and in 2002, a decade-long cycle of litigation between the two doctors ensued.

The 2002 Lawsuit

A 2002 lawsuit between the parties culminated in the plaintiff buying defendant’s stock in the medical corporation.  The court in the 2002 case didn’t rule on whether the Non-Compete was enforceable.

The 2007 (and current) Lawsuit

In the 2007 case, plaintiff sued defendant alleging the defendant violated the Non-Compete by going to work for a rival practice within 20 miles of plaintiff’s office. 

The trial court dismissed.  It held that the Non-Compete didn’t apply because defendant didn’t withdraw and wasn’t expelled from the medical corporation.  Plaintiff appealed.

Ruling: Affirmed.

Reasoning:

The court rejected plaintiff’s law of the case (LOTC) argument.  The LOTC doctrine prevents relitigation of an issue of fact or law previously decided in the same case.  ¶ 14.  Its purpose is to avoid repetitive litigation of the same issues and to foster finality and consistency in litigation.  LOTC reflects the court’s preference to generally not reopen previously decided issues.

Here, there was no adjudication of the Non-Compete in the 2002 case.  The core issue litigated in that first suit was the valuation of defendant’s shares and whether plaintiff served a proper election to purchase those shares.

Since the cardinal issues in the 2002 and 2007 Lawsuits substantively differed, LOTC didn’t prevent defendant from challenging the Non-Compete in the 2007 case. ¶¶  17-19.

The court also found the Non-Compete wasn’t enforceable.  In Illinois, noncompetition clauses in the medical services context are heavily scrutinized and only validated where they have reasonable time and space limits.

¶¶ 22-24.

Finding the Non-Compete unambiguous, the Court held that the 5 year/20-mile strictures attached in only two circumstances: where a shareholder either (1) withdrew or (2) was expelled from the practice.  Here, defendant  didn’t withdraw and she wasn’t expelled.  As a result, the Non-Compete didn’t prevent the defendant from practicing within twenty miles of plaintiff’s office.  ¶¶ 25-29.

Afterwords: Clarity in contract drafting is critical.  The case illustrates that a Court won’t strain to find ambiguity where contract language is facially clear.  Gingrich also illustrates that a restrictive covenant will be construed in favor of permitting, instead of stifling, competition.  In hindsight, the plaintiff should have made it clear that if a shareholder departed the medical practice for any reason: whether voluntary, forced, or after a buy-out, the non-compete would still govern.

 

 

 

Lawyer’s Breach of Fiduciary Duty and Constructive Trust Claim Against Ex Law Partner Barred By 5-Year Statute of Limitations

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Jimmy Connors is one of my all-time favorite tennis players and professional athletes.  Not just because he was such a fiery competitor who seemed to literally spill his blood and guts every time he took the court.  But because of his racket.

In an era dominated by space-age racket technologies like Kevlar, ceramics and various graphite-fiberglass amalgams, Connors stuck with his trusty Wilson T2000 – a primitive piece of steel with a wrap-around string aesthetic and microscopic sweet spot.  

There was just something about seeing the consummate throwback Connors, and his anachronistic Tool of his Trade,  continually vanquish a parade of younger adversaries with their ultra-modern tennis accoutrements that resonated with the purist in me.

That’s why Brennan v Constance, 2014 IL App (5th) 110555-U (2014), a lawsuit involving two former law partners fighting over legal fees owed by the tennis legend, naturally piqued my interest.

Facts:

The plaintiff and defendant was ere law partners in a three-person firm (the Firm).  Connors was a long-time Firm client.  

When the Firm disbanded, a major sticking point was fees owed the Firm by Connors for previous services.  Defendant believed the fees were his (since Connors was originally his client) while the other Firm members viewed the Connors fees owed to the Firm.

After more than a decade of litigation, Connors paid nearly $11 million to the Firm.  Defendant received nearly $7 million, while a former Firm partner got about $4M.

Plaintiff sued to impose a constructive trust over a portion of the $7 million in fees recovered by defendant because plaintiff believed defendant misled him concerning the amounts owed from the tennis great.

After a three-week bench trial, the Court entered judgment in plaintiff’s favor and imposed a constructive trust on the fees and awarded plaintiff more than $1.64 million – an amount equal to 25% of the Connors fees paid to defendanT.

Held: trial court reversed.  Plaintiff’s suit is time-barred.

Rules/Reasoning:

Plaintiff’s suit was barred by the five-year statute of limitations governing breach of fiduciary duty claims. 

Code Section 13-205’s five-year limitations period governs constructive trust and fiduciary duty claims.  ¶ 60, 735 ILCS 5/13-205.  A statute of limitations starts running when the cause of action accrues (when facts exist which authorize bringing the action).  

The “discovery rule” tolls (stops) the running of a limitations period until an injured plaintiff knows or should know he has been injured. 

Fraudulent concealment of a claim also tolls the limitations period.  ¶ 61.  In “passive” concealment cases, the plaintiff must show that defendant concealed a material fact that he was under a duty to disclose.  ¶ 63.   However, a plaintiff who knows he has been injured has a duty to investigate further and the limitations period will run when the plaintiff is put on “inquiry notice.”  A plaintiff doesn’t have to know the full extent of his injuries before the statutory clocks start ticking.

In reversing the plaintiff’s judgment, the 5th District found the plaintiff was on inquiry notice as early as 2004 (when he admittedly first learned of an aborted stock transfer that would have netted the Firm millions) but didn’t sue until 2010.  Since plaintiff missed the five-year limitations period, his suit was too late.

The Court also rejected plaintiff’s fiduciary duty argument: that since defendant owed plaintiff a fiduciary duty as a former law partner, it relaxed the limitations period.  The Court disagreed.  It held that while a fiduciary relationship may excuse an initial failure to investigate, it won’t lengthen the time to sue where a plaintiff knows of possible wrongdoing and fails to act on it.  ¶¶ 70-71.

Afterwords: This case illustrates the harsh results for  litigants who sits on their rights.  While a fiduciary relationship can bolster a fraudulent concealment argument and toll a limitations period, if facts exist that should put a reasonable person on inquiry notice of a wrongful act, the limitations period will run from the date of that notice.