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Grochocinski v. Mayer Brown Rowe & Maw LLP

June 28, 2007

DAVID GROCHOCINSKI, NOT INDIVIDUALLY, BUT SOLELY IN HIS CAPACITY AS THE CHAPTER 7 TRUSTEE FOR THE BANKRUPTCY ESTATE OF CMGT, INC. PLAINTIFF,
v.
MAYER BROWN ROWE & MAW LLP, RONALD B. GIVEN AND CHARLES W. TRAUTNER, DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiff David Grochocinski, ("Grochocinski" or the "Trustee") as Chapter 7 Trustee for the bankruptcy estate of CMGT, Inc. ("CMGT") filed suit against Mayer Brown Rowe and Maw, LLP ("MBRM"), Ronald Given ("Given" and together with MBRM, "Lawyer Defendants") and Charles W. Trautner ("Trautner") for legal malpractice. Before the Court is the Lawyer Defendants' Motion to Dismiss. For the reasons stated herein, the Lawyer Defendants' Motion to Dismiss is granted in part and denied in part.

Facts

CMGT entered into an agreement with MBRM for legal services in connection with CMGT's efforts to obtain financing for its operations. By the terms of the agreement for legal services between MBRM and CMGT (the "Agreement"), MBRM would represent CMGT in connection with its financing efforts and related activities and would be paid its legal fees only in the event CMGT's efforts to obtain financing were successful.

In addition to MBRM, CMGT also hired Spehar Capital, LLC ("Spehar") on a commission basis to locate potential sources of financing for CMGT. After numerous negotiations with potential financiers, MBRM and executives at CMGT settled on a funding opportunity proposed by Trautner, who was CMGT's largest shareholder. The financing was to be provided through creation of a new entity, "Newco," of which CMGT was to have partial ownership.

Trautner brought the Newco deal to CMGT's management -- specifically, to Louis Franco ("Franco"), CMGT's Chief Operating Officer -- in January 2003. At that time, Trautner, Franco, Given, and Spehar's principal, Gerry Spehar ("Gerry"), discussed the proposal on a conference call during which Franco asked Gerry to question Trautner with respect to the details of the Newco deal. After discussing the proposal, Franco rejected the Newco deal -- which would not have honored any of CMGT's investor's notes and would have left CMGT's shareholders with only 20% equity -- as a "sweetheart" deal for Trautner and his investors.

Several months later, in or around May 2003, Given and Trautner revived Trautner's Newco deal under terms identical to those that Franco had rejected in January 2003. Given drafted a letter of intent for the Newco deal, the terms of which provided that Newco would purchase all of CMGT's assets for either (1) $500,000; or (2) 20% of the shares of Newco. If CMGT opted to accept 20% of the shares of Newco, Trautner and his investors would be required to provide an assurance that Newco's initial capitalization would be at least $2.5 million. The Trustee alleges that Given pressured Franco to agree to the Newco letter of intent without advising Franco that a better deal (for CMGT) might be available elsewhere because the Newco deal ensured that MBRM's accrued fees would be paid while other potential sources of financing may have left MBRM's fees in doubt. On or about August 1, 2003, Franco signed the Newco letter of intent, which provided for closing on September 30, 2003.

Shortly after signing the letter of intent, Franco advised CMGT's shareholders about the Newco deal. On August 14, 2003, Franco sent CMGT's shareholders a letter soliciting proxies for the Newco deal and stating that there were no other sources of financing available -- even though Given and Franco had pre-approved a letter of intent for a proposal Spehar had brought forward from the Washoe Tribe.

Just before the financing arrangement with Newco was to close, Spehar demanded commission for the Newco funding deal, asserting that the Newco deal was within the scope of its agreement with CMGT. CMGT and MBRM contested Spehar's right to the commission under that agreement because, they asserted, the Newco letter of intent resulted from negotiations in which Spehar had played no part. When CMGT would not agree to pay the commission to Spehar, Spehar filed suit against CMGT in California (the "California Lawsuit") and moved for a Temporary Restraining Order ("TRO") to halt the deal between CMGT and Newco. According to the complaint, the Lawyer Defendants advised CMGT not to respond to the Motion for TRO. No one appeared on CMGT's behalf at the hearing on that motion and the California court entered the TRO against CMGT, scuttling the Newco deal and preventing CMGT from obtaining financing for its operations from any other source. Several months later, Spehar obtained a default judgment against CMGT in the California Lawsuit in the amount of $17 million.*fn1 CMGT offered no defense in the California Lawsuit, having been advised by the Lawyer Defendants -- according to the complaint -- not to appear.

Approximately six months later, using the $17 million default judgment it obtained in the California Lawsuit, Spehar filed an involuntary petition for bankruptcy against CMGT. The Trustee of the bankruptcy estate has filed this two count action against the Lawyer Defendants for legal malpractice. Count I alleges that the Lawyer Defendants provided negligent advice provided to CMGT prior to the California Lawsuit. Among other things, Count I alleges that the Lawyer Defendants failed to advise CMGT to settle its dispute with Spehar before it escalated to litigation and, as a result, CMGT lost any hope of obtaining financing for its operations. Count II alleges that the Lawyer Defendants provided negligent advice to CMGT after the California Lawsuit was filed. Essentially, Count II alleges that the Lawyer Defendants failed to defend CMGT and even advised CMGT not to appear in the California Lawsuit and, as a result, the California court entered the $17 million default judgment against CMGT.

Standard

"A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of a complaint for failure to state a claim upon which relief may be granted." Johnson v. Rivera, 272 F.3d 519, 520-21 (7th Cir. 2001). In ruling on a motion to dismiss, the court must assume all facts alleged in the complaint to be true and must view the allegations in the light most favorable to plaintiffs. See, e.g., Singer v. Pierce & Assocs., P.C., 383 F.3d 596, 597 (7th Cir. 2004). To survive a motion to dismiss, a complaint must set forth facts sufficient to establish a plausible entitlement to relief. Bell Atlantic Corp. v. Twombly, No. 05-1126, slip op. at 8-9, 550 U.S. ___, 2007 U.S. LEXIS 5901 (May 21, 2007) ("While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations . . . [there] must be enough to raise a right to relief above the speculative level."). In determining the sufficiency of the complaint, courts consider the exhibits to the complaint but where an exhibit conflicts with the allegations in the complaint, the exhibit typically controls. Massey v. Merrill Lynch & Co., 464 F.3d 642, 645 (7th Cir. 2006) (citing Centers v. Centennial Mortgage, Inc., 398 F.3d 930, 933 (7th Cir. 2005)).

Discussion

"To prevail on a legal malpractice claim, the plaintiff client must plead and prove that the defendant attorneys owed the client a duty of care arising from the attorney-client relationship, that the defendants breached that duty, and that as a proximate result, the client suffered injury." Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d. 389, 394 (Ill. 2006); see also Keef v. Widuch, 747 N.E.2d 992, 997 (Ill. App. Ct. 2001). In cases such as this one, these elements effectively demand that the malpractice plaintiff present two cases, one showing that her attorney performed negligently, and a second, or predicate "case within a case," showing that she would have prevailed upon the underlying case but for her attorney's negligence. Mihailovich v. Laatsch, 359 F.3d 892, 904-05 (7th Cir. 2004) (citing Ignarski v. Norbut, 271 Ill. App. 3d 522, 525-26 (Ill. App. Ct. 1995)).

The Lawyer Defendants argue that the Complaint must be dismissed because: (1) Spehar has orchestrated a fraud on the judicial system; (2) with respect to Count II, the Trustee himself proximately caused the loss to CMGT; (3) with respect to Count II, there are no damages; and (4) the Trustee has not met his burden to plead the existence of a duty, the breach of the duty, or proximate cause of an injury.

I. Fraud on the Judicial System

Quite apart from their arguments as to why the Complaint must be dismissed for its failure to state a claim, the Lawyer Defendants' opening argument is that the Complaint should be dismissed as a "fraud on the judicial system." The Lawyer Defendants argue that: (1) Spehar filed an admittedly meritless suit against CMGT in California; (2) Spehar then obtained a TRO that prevented CMGT from obtaining financing, which order, in turn, allowed Spehar to obtain a "bogus" default judgment against CMGT; (3) Spehar then used the default judgment to file a single-creditor involuntary bankruptcy action against CMGT; and (4) Spehar then, "orchestrated and funded the filing of this malpractice suit" against the Lawyer Defendants.

In support of their argument, the Lawyer Defendants cite only one case, REP MCR Realty, L.L.C. v. Lynch, 363 F.Supp. 2d 984, 998 (N.D. Ill. 2005),*fn2 for the unremarkable proposition that federal courts have the inherent authority to sanction litigants for bad-faith or fraudulent conduct and that the available sanctions include dismissal with prejudice. "[T]he Supreme Court has indicated that a sanction under the inherent power is appropriate only where the party 'acted in bad faith, vexatiously, wantonly, or for oppressive reasons.'" Corely v. Rosewood Care Ctr., Inc., 142 F.3d 1041, 1058 (7 th Cir. 1998) (emphasis added) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991)). "Of all possible sanctions, dismissal is considered 'draconian.'" Maynard v. Nygren, 332 F.3d 462, 467 (7th Cir. 2003) (citing Marrocco v. Gen. Motors Corp., 966 F.2d 220, 223-24 (7th Cir. 1992)). In order to obtain a ...


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