Opinion
Case No. 95 C 3867.
March 25, 1998
MEMORANDUM OPINION AND ORDER
Plaintiffs First Interstate Commercial Mortgage Company and DAG Management, Incorporated (collectively referred to as "FI") are suing the law firm of Hinshaw Culbertson ("HC") for legal malpractice. In count one of its second amended complaint, FI alleges that HC negligently failed to exercise due care in its legal representation of FI. In count two, FI alleges that HC's legal representation breached its contract with FI. Pursuant to Rule 56 of the Federal Rules of Civil Procedure, HC moves for summary judgment on both counts. For the following reasons, the court grants HC's motion in part and denies it in part.
Background
FI is a Delaware corporation with its principle place of business in Los Angeles, California. FI is a lending institution and a wholly owned subsidiary of DAG Management, Inc. ("DAG"). DAG is a Colorado corporation also headquartered in Los Angeles, California. Defendant HC is a law firm partnership including professional corporations with partners in Illinois, Wisconsin, Missouri, and Florida. The court therefore exercises diversity jurisdiction over this lawsuit under 28 U.S.C. § 1332.
This legal malpractice action arises out of an office building construction project. In 1989, a man named Marvin Romanek ("Romanek") was developing an office building at 633 N. Saint Claire Street in Chicago, Illinois ("the construction project"). Romanek principally funded this construction project by obtaining a $90 million loan from FI and FI's co-lender, Continental Bank ("Continental"). FI was responsible for $45 million of the $90 million loan and retained HC through HC partner Stephen A. Malato to provide legal advice and representation in this loan deal.
The court will collectively refer to FI and Continental as "the banks."
FI later sold one half of its $45 million interest in the loan deal to First Interstate Bank of California, a separate legal entity.
In 1989, Romanek entered into an agreement with Janivo Holding Company ("Janivo"), a privately held Dutch Company. Under their contract, Romanek immediately conveyed to Janivo a twenty percent interest in the land trust that held legal title to the construction project. In exchange for this conveyance, Janivo promised to pay $31,147,400 upon the completion of the "core and shell" of the building.
The contract also required Romanek and Janivo to enter into a partnership agreement. According to the contract, Janivo promised to reconvey its twenty percent interest in the controlling land trust to the Romanek/Janivo partnership once the parties established their partnership. The partnership would then own one hundred percent of the land trust that held legal title to the construction project.
Janivo did not pay the $31 million up-front; instead, Janivo secured its promise to pay the $31 million with a letter of credit payable to Continental. Collection on the $31 million letter of credit was restricted by the letter of credit as well as a "separate agreement." Under paragraph 7 of the separate agreement, Continental promised not to draw or seek to draw under the letter of credit unless:
(b) Continental has received and delivered to Janivo a title insurance policy, dated not earlier than thirty days prior to any such draw, issued by a title insurance company authorized to do business in the State of Illinois issued to Janivo insuring title to Trustee of the Property, free and clear from all liens and encumbrances other than building estate taxes which are not yet due or payable, title defects (except for those which do not have a material adverse effect on the use, occupancy or value of the Property) and the Construction Loan Documents, together with an endorsement to said title policy declaring that the entire beneficial interest in the Trust is owned by Developer free and clear of all liens and encumbrances, a zoning endorsement, an endorsement against mechanics liens for work performed prior to the date of such endorsement and an endorsement of non-imputation of the knowledge of partners of Developer other than Janivo to Janivo. . . .
The parties agree that the term "Developer" refers to the Romanek/Janivo partnership.
* * *
Janivo acknowledges that, except for the requirement that the following documents be dated not earlier than thirty days prior to any draw under the Letter of Credit[,] the title insurance commitment no. N890328 issued by First American Title Insurance Company dated April 12, 1989, subject to the deletion of item nos. 5, 6, 7, 8, 11, 12, 13, 14, 16, and 18 contained therein, satisfies the requirements of (b) above.
The letter of credit also prohibited Continental from drawing on the letter of credit until it certified in writing to the confirming bank that all requirements of the separate agreement had been satisfied.
In short, the separate agreement set forth two means by which the banks could draw on the $31 million letter of credit: (1) follow the extensive procedures of paragraph 7(b) which required delivery of a conforming title policy and an endorsement that the Romanek/Janivo partnership owned one hundred percent of the construction project; or (2) under the alternative performance provision of paragraph 7, deliver to Janivo "the title insurance commitment no. N890328 issued by First American Title Insurance Company" and dated "not earlier than thirty days prior to any draw under the Letter of Credit."
By September 1991, Romanek and Janivo and still not formed the partnership required by their original agreement. Accordingly, Janivo took the position that, under paragraph 7(b) of the separate agreement, no draw could be made on the letter of credit because the requisite partnership did not exist. In response, the banks invoked the alternative method of performance set forth in paragraph 7 to draw on the letter of credit.
On November 18, 1991 Continental delivered to Janivo a title policy insuring the construction project purporting to conform to the alternative method of performance set forth in paragraph 7 of the separate agreement. The title policy issued was First American Title Insurance Company Policy No. OP 551587, Number N911069. This policy failed to delete certain "exceptions" as paragraph 7 required. Two days later, on November 20, 1991 Continental presented the necessary documents to draw on the letter of credit, including a certificate stating that it had met all conditions required by the separate agreement. On November 25, 1991, the confirming bank paid the full amount of the letter of credit.
On December 2, 1991, after the banks drew on the $31 million letter of credit, Janivo filed a lawsuit against the banks. Janivo alleged breach of trust, breach of presentment warranty, breach of the separate agreement, unjust enrichment, and conversion ("the Janivo litigation"). Eventually, Judge Alesia disposed of all claims except one claim for breach of the separate agreement. See Janivo Holding, B.V. v. Continental Bank, 859 F. Supp. 316, 322 (N.D. Ill. 1994). Specifically, Judge Alesia held that a factual dispute existed over "whether inclusion of the standard exceptions in the delivered Title Policy constituted a material breach of the Separate Agreement."Id. One day before the parties were scheduled to begin trial, they settled their dispute. Under the settlement agreement, the banks paid approximately $18.5 million to Janivo.
After the Janivo litigation was initiated, HC learned that the title policy documents it issued in November 1991 still did not conform to the requirements of paragraph 7. HC Therefore issued new policy documents in attempt to cure the defects. On March 11, 1992, HC issued these documents which deleted the five "exceptions" as required by paragraph 7. However, the new documents failed to meet the condition that they be dated no more than thirty days before the date of the draw on the letter of credit. Thus, even HC's "curative" documents were defective.
FI is now suing HC for legal malpractice to recover the share of the settlement amount it paid to Janivo. FI asserts two counts against HC. In count I, FI alleges the tort of legal malpractice; in count II, FI alleges that HC's representation of FI breached their contract. Both counts, however, are based on the same conduct. Specifically, FI alleges that HC negligently drafted the letter of credit, the separate agreement, and the construction loan agreement, thereby enabling Janivo to argue that the banks could not draw on the letter of credit unless the Romanek/Janivo partnership had been formed ("the drafting claims"). FI also contends that HC breached its duties by failing to deliver title policy documents that conformed with paragraph 7 of the separate agreement ("the title policy claims"). HC moves for summary judgment on both the drafting claims and the title policy claims.
Analysis
The court will render summary judgment only if the factual record shows "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Bratton v. Roadway Package Sys., Inc., 77 F.3d 168, 173 (7th Cir. 1996) (quoting Fed.R.Civ.P. 56(c)). The court will not render summary judgment if "a reasonable jury could return a verdict for the nonmoving party." Sullivan v. Cox, 78 F.3d 322, 325 (7th Cir. 1996) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). In ruling on a motion for summary judgment, the court views the facts in the light most favorable to the nonmoving party. Bratton, 77 F.3d at 171 (citation omitted);Sullivan, 78 F.3d at 325 (citation omitted). On a motion for summary judgment, the moving party "bears the initial burden of showing that no genuine issue of material fact exists." Hudson Ins. Co. v. City of Chicago Heights, 48 F.3d 234, 237 (7th Cir. 1995) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). Then the burden shifts to the nonmoving party, which "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); accord, NLFC, Inc. v. Devcom Mid-America, Inc., 45 F.3d 231, 234 (7th Cir. 1995).
I. The Waiver Agreement
In November 1993, FI and HC executed the first of three "tolling agreements" that temporarily suspended the statute of limitations on FI's legal malpractice claims. HC argues that FI expressly waived its right to assert the drafting claims in these tolling agreements. The waiver clause provides:
Except for claims based on legal malpractice due to any legal service rendered concerning the alleged nonconformance of [the delivered policy or modifications] to the terms . . . of the letter of credit . . . First Interstate expressly and affirmatively waives any and all claims which First Interstate may have against Stephen A. Malato and Hinshaw Culbertson arising out of . . . the letter of credit . . . and any other transactions between First Interstate and [the developers of the project] with respect to 633 St. Claire Place.
FI recognizes that this clause applies to its drafting claims. However, FI argues that this waiver is invalid because HC forced FI to make the waiver under conditions of economic duress. Specifically, FI contends that its officer and decision-maker, James Erwin ("Erwin"), agreed to the waiver because failing to do so:
might have serious adverse effects on First Interstate's defenses against Janivo. Such an action would have required First Interstate to assert claims against Hinshaw and Mr. Malato that directly contradicted positions First Interstate was taking against Janivo. Such an action would also have involved taking an adverse and hostile position against a key witness, Mr. Malato, whom First Interstate intended to call in the Janivo case.
(Pls.'s Mem. in Opp. to Def.'s Mot. for Summ. J. at 9-10.) FI also insists that, as FI's attorneys, HC should not have taken advantage of its client by procuring this waiver agreement.
Economic duress is a recognized affirmative defense to an action on a contract or note. FDIC v. Linn, 671 F. Supp. 547, 556 (N.D. Ill. 1987). The Seventh Circuit carefully explained the parameters of the economic duress defense in Resolution Trust Corp. v. Ruggiero, 977 F.2d 309, 313-14 (7th Cir. 1992). Essentially, the court established that in Illinois:
economic duress is present where one is induced by a wrongful act of another to make a contract under circumstances which deprive him of the exercise of free will, and a contract executed under duress is voidable . . . To establish duress, one must demonstrate that the threat has left the individual "bereft of the quality of mind essential to the making of a contract."Resolution Trust Corp., 977 F.2d at 313 (quoting Alexander v. Standard Oil Co., 423 N.E.2d 578, 582 (Ill.App.Ct. 1981));see also Herget Nat'l Bank v. Theede, 537 N.E.2d 1109, 1111 (Ill.App.Ct. 1989). Of course, "[d]uress is not shown by the fact that one was subjected to . . . a difficult bargaining position or the pressure of financial circumstances." Herget Nat'l Bank, 537 N.E.2d at 1112; Selmer Co. v. Blakeslee-Midwest Co., 704 F.2d 924, 928 (7th Cir. 1983) ("The mere stress of business conditions will not constitute duress where the defendant was not responsible for the conditions"); Linn, 671 F. Supp. at 560 ("Defendants cannot blame [plaintiffs] for the pressures caused by defendants' own business decisions and by general economic conditions"). The pressure applied must have been wrongful or unlawful; mere hard bargaining is not enough. Linn, 671 F. Supp. at 556, 559. Moreover, a party's threat to assert its legal rights does not rise to the level of duress unless it involves some abuse of the legal process.Thelin v. Mitchell, 576 F. Supp. 1404, 1408 (N.D. Ill. 1983);Enslen v. Village of Lombard, 470 N.E.2d 1188, 1190-91 (Ill.App.Ct. 1984).
The facts of this case do not present a situation of economic duress. The evidence reveals no "wrongful act" committed by HC to secure FI's waiver. Contrary to FI's argument, HC was clearly not acting as FI's attorneys when FI signed this waiver. Rather, the record reveals that FI and HC had already assumed adversarial positions and both parties had retained counsel to represent them in their dispute. HC's position on the issue was nothing more than hard bargaining. HC knew it had the legal right to refuse to enter the tolling agreement and HC asserted that right to its advantage. By asserting its legal right to use the statute of limitations as a shield from lawsuits, HC did not abuse the legal process. The fact that HC employed this bargaining strategy does not constitute duress. The undisputed evidence therefore shows that HC did not commit a wrongful act by insisting on the waiver provision.
FI's argument that it suffered duress because suing HC would have required FI to assert claims that contradicted its defense against Janivo also fails. First, there is no reason why FI could not have taken inconsistent positions in separate litigations. The Federal Rules of Civil Procedure certainly allow litigants to advance conflicting legal theories. Additionally, since the parties in the two lawsuits would have been different, the doctrine of collateral estoppel could not have been used against FI in the separate lawsuit. Accordingly, the evidence fails to establish that taking contradictory positions in the two lawsuits would have placed any undue pressure on FI to agree to the waiver. Therefore, even if HC committed a "wrongful act" by bargaining for and obtaining the waiver, FI fails to present any evidence of resulting duress.
The only reason that the court can envision would stop a party from asserting contradictory positions in different litigations is the possibility that doing so would reveal some act of perjury. The court in no way means to suggest that reason existed in this case. However, the court notes that FI does not even attempt to explain precisely what contradictory positions it would have been forced to assert or how those inconsistencies would have caused it economic harm.
Finally, economic duress must be based on a threat that has some reasonable degree of materializing. FI fails to present any evidence that if it had sued HC for malpractice, rather than agreeing to the waiver provision, it would have suffered economic harm. FI's economic duress argument is premised on a hypothetical threat — namely, the result of a trial with Janivo — a trial that never happened. FI speculates that if it would not have waived its drafting claims, it would have suffered terrible economic consequences in the hypothetical trial. The court finds FI's hypothetical economic duress argument untenable. Simply put, no party can predict (or prove) with any degree of certainty who would have prevailed if the Janivo litigation had gone to trial. Consequently, the court grants HC's motion for summary judgment on the drafting claims. Those claims are barred by FI's express waiver.
II. The Statute of Limitations
FI filed this legal malpractice lawsuit against HC on June 30, 1995. HC argues that the Illinois two year statute of limitations governing legal malpractice claims, 735 ILCS 5/13-214.3, bars FI from bringing any of its claims. FI responds that the facts do not establish the date on which FI's legal malpractice cause of action accrued. The court agrees with FI and therefore denies HC's motion for summary judgment on this issue.
In Illinois, legal malpractice claims accrue under the "discovery rule." Thus, a cause of action does not accrue until a plaintiff (1) knows or reasonably should know of his injury, and (2) knows or should know that the injury was wrongfully caused.Jackson v. Leydig, Voit Mayer, 633 N.E.2d 627, 630-31 (Ill. 1994). Whether a party knew or should have known of his injury and the wrongful nature of that injury are questions of fact that are not particularly suitable for resolution at the summary judgment stage of litigation. Id.
HC argues that FI knew or should have known that its claims accrued in November 1991. HC bases this argument on the fact that FI sought and obtained tolling agreements from HC in November 1993. HC also points to James Erwin's deposition statements that if FI did not obtain the tolling agreements in November 1993, they would have had to sue HC immediately.
FI contends that the mere fact that it sought tolling agreements in 1993 does not establish that it knew of its cause of action in November 1991. FI also presents evidence that it was unsure of precisely when its malpractice claims against HC accrued. Accordingly, FI argues that it obtained the tolling agreements merely as a precaution rather than a means of preventing the statute of limitations from expiring.
While FI's actions coupled with Erwin's testimony raise an inference that FI knew of its claims against HC in November 1991, these facts alone are not dispositive. Additionally, FI has produced evidence that it was uncertain of exactly when its cause of action accrued. Erwin testified that FI executed the tolling agreements as a precautionary measure rather than to preserve a claim FI knew it would otherwise lose. This evidence raises a reasonable inference that FI did not know when its claims against HC accrued. Faced with these conflicting inferences, and because FI's knowledge is a difficult factual issue, the court denies HC's motion for summary judgment on the statute of limitations issue.
III. HC's Conduct Regarding the Title Policy Claims
FI's "title policy claims" allege that HC (1) failed "to correct obvious deficiencies in the Delivered Policy tendered to Janivo in connection with the draw on the letter of credit," and (2) failed "to correct an obvious deficiency in the supposedly curative title documents tendered to Janivo in March 1992." (Pls.'s Second Amend. Compl. at ¶¶ 49(c) (d); ¶¶ 59 (c) (d).) HC now moves for summary judgment on these claims, arguing that its conduct did not breach its duty of professional care. In essence, HC attempts to blame everybody but itself for the admittedly "obvious" defects in the title policy documents. The court need go no further than HC's own brief to deny HC's motion for summary judgment on this issue.
Most of HC's argument on this issue emphasizes that the law firm of Mayer, Brown Platt "took the lead" and "presented" the title policy documents to Janivo. HC admits, however, that its partner, Stephen Malato, "worked with the title company to obtain a title policy to deliver to Janivo and attempted to satisfy the title company's requirements so it would waive the standard exceptions." (Def.'s Mem. in Supp. of Mot. for Summ. J. at 20.)
Regardless of who "took the lead" or "delivered" the policy, HC admits that its partner worked directly with the title insurance company and oversaw the creation of the faulty title documents. Based on this admitted participation in the creation of the allegedly defective title insurance documents, a reasonable jury could conclude that HC breached its duty of professional care with respect to the title policy claims. Accordingly, the court denies HC's motion for summary judgment on this issue.
IV. The Janivo Settlement
HC next contends that the tolling agreements preclude FI from asserting any malpractice claims for liability arising from the Janivo suit unless the liability was "due to" the title policy claims. According to HC, the Janivo case did not settle "due to" the title policy claims, but rather because the Romanek/Janivo partnership never formed. The court thanks defense counsel for again saving the court's time. Once again, HC's own brief points out the very facts which preclude summary judgment. Thus, the court has not even had to read FI's response to conclude that HC's motion on this issue must be denied.
In its motion, HC correctly points out that "the title policy claims were the only remaining claims in the [Janivo] case to be litigated." (Def.'s Mem. in Supp. of its Mot. for Summ. J. at 23.) It as not until Judge Alesia disposed of all claims except the tile policy claims that the Janivo litigation settled. Since the title policy claims constituted the sole remaining dispute between Janivo and the banks, and the Janivo litigation did not settle until after all other issues were resolved in the banks' favor, a reasonable person would almost have to conclude that the Janivo settlement was "due to" the title policy claims. No reasonable person could possibly conclude that the banks paid $18.5 million to settle claims that had already been resolved it their favor. The court therefore denies HC's motion for summary judgment on this issue. The court warns defense counsel to never again waste the court's time with arguments as frivolous as this one. The court also denies HC's motion for summary judgment on the causation issues for the same reasons.
V. Damages
The court finds genuine issues of material fact over the damages issues and therefore denies HC's motion for summary judgment as to damages. As the owner of FI, DAG is entitled to recover for any legal malpractice committed by HC that caused DAG to incur economic harm. Additionally, the record shows that FI and DAG, not First Interstate of California, sustained the economic harm as a result of HC's alleged malpractice. Accordingly, the court denies HC's motion for summary judgment on the damages issues.
Conclusion
The court grants HC's motion for summary judgment in part and denies it in part. FI expressly waived its right to assert any drafting claims. However, there exist several disputed facts for trial over FI's title policy claims. The parties should discuss settlement before the next court date.