Wednesday, October 28, 2015

Illinois Supreme Court Addresses Legal Malpractice, Direct Versus Derivative Distinction (But Why Does it Keep Describing an LLC as a “Corporation”?)

Illinois Supreme Court Addresses Legal Malpractice, Direct Versus Derivative Distinction (But Why Does it Keep Describing an LLC as a “Corporation”?)

In a recent decision, the Illinois Supreme Court addressed the standard for a successful claim for legal malpractice, here in the context of the direct versus derivative distinction. Unfortunately, in the course of an otherwise analytically sound decision, that same court repeatedly utilized the nomenclature of corporations in discussing the legally distinct limited liability company (“LLC”). Stevens v. McGuireWoods LLP, Docket No. 118652, 2015 IL 118652, 2015 WL 5608264 (Ill. Sept. 24, 2015).
The named plaintiffs had been members of Breeland Management LLC (“Breeland”). They hired McGuireWoods LLP to bring suit against Breeland’s managers and majority owner, Rogers, on claims based upon misappropriation of trademarks and intellectual property.  These claims were brought both individually and derivatively on behalf of Breeland.  Many of those counts were dismissed.
After that dismissal, the named plaintiffs retained new counsel, who filed an amended complaint restating the original claims against the managers and the majority owner, as well as adding seven counts against Breeland’s counsel, Sidley Austin LLP.  Sidley moved to dismiss those claims based upon a variety of bases including failure to state a claim but, most importantly for this dispute, statutes of limitation and repose. The trial court would dismiss all the claims against Sidley with prejudice based upon the statute of limitations/repose.

Ultimately the named plaintiffs would settle with Rogers, the majority owner of Breeland, and be cashed out.
After having been cashed out, the named plaintiffs filed a legal malpractice action against McGuireWoods, seeking not less than $10,000,000, primarily on the basis that the initial lawsuit had not included the claims against Sidley within the applicable statute of limitations/repose. The action was again both individual and derivative.  The trial court dismissed the suit.
On appeal to the intermediate court, the determination that the individual claims against McGuireWoods would be dismissed was affirmed. The intermediate Court of Appeals, however, noted that the trial court had never expressly addressed the named plaintiffs’ capacity to, on a derivative basis, bring a claim against Sidley. The Illinois Supreme Court accepted review of that question.
The Illinois Supreme Court began its analysis by noting the rules as to what is required for a successful legal malpractice claim. Essentially, the plaintiff bears the burden of demonstrating that, as a direct and proximate result of the attorneys poor performance, the plaintiff suffered actual monetary damages i.e., that they would have prevailed absent the alleged malpractice.

Ultimately, the futility of the malpractice action came down to a question of standing. The various allegations, asserted by the named plaintiffs individually, were deficient in that they were based upon injuries suffered by Breeland Management. As such, the claims are derivative in nature, and the named plaintiffs had no expectation of an individual recovery thereon. As to the claims, now characterized as derivative, any recovery would be to Breeland Management; the named plaintiffs could not have received any of the fruits of the lawsuit, even had it been successful. While Breeland, directly, or the remaining minority members of Breeland, derivatively, still might have a valid claim against McGuireWoods, these named plaintiffs did not. Rather:
That said, plaintiffs have an insurmountable problem even as to their derivative claims. In the insurmountable problem is that, even assuming that McGuirewoods had successfully prosecuted plaintiffs’ derivative claims against Sidley, plaintiffs would not have recovered anything from the resulting judgment in their individual capacities.

Slip op. at ¶ 15.

All that said, this opinion suffers from a failure to utilize the appropriate nomenclature. In fact, the first substantive sentence of the decision refers to the “shareholders” of an LLC.  LLCs have members not shareholders. In ¶ 4 of the decision, it is stated that “as Breeland’s corporate counsel, Sidley’s duty ran solely to the corporation and not to its individual shareholders.” (emphasis added). Of course, Breeland was a LLC, not a corporation, so Sidley was the LLC’s counsel with a duty to the LLC and not its members. Later, at ¶ 20 of the opinion, it is stated that “in Illinois, shareholders cannot recover personally on LLC derivative claims.” (emphasis added) Again, LLCs do not have shareholders.  At ¶ 23 of the decision, even while citing the Illinois Limited Liability Company Act, it is recited that in order to have standing “to bring a derivative claim, the plaintiff must have been a shareholder at the time of the transaction at which he complains and must maintain his status as shareholder throughout the entire pendency of the action.” (emphasis added, italics in original). Of course, the cited provision of the Illinois Limited Liability Company Act does not say anything about shareholders, but only about members.

Thanks to Bob Keatinge for the laad on the decision.

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