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Grochocinski v. Mayer Brown Rowe & Maw LLP

March 31, 2010

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: Virginia M. Kendall United States District Judge Northern District of Illinois

Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

David Grochocinski ("Grochocinski"), in his capacity as Chapter 7 Trustee for the bankruptcy estate of CMGT, Inc. ("CMGT") sued Mayer Brown Rowe & Maw LLP ("Mayer Brown") and Ronald B. Given ("Given"), an attorney at Mayer Brown, (collectively the "Defendants"),*fn1 for legal malpractice. Defendants moved for summary judgment, claiming that the suit was brought improperly, and, if successful, would conclude in an absurd result and a fraud on the judicial system. The Court finds that to protect the integrity of the judicial system, judicial estoppel must be applied here. The Court grants summary judgment for the Defendants.

STATEMENT OF FACTS

CMGT is a Delaware corporation that became the subject of an involuntary bankruptcy filing on August 24, 2004. (Pl. 56.1 Resp. ¶ 1.)*fn2 Lou Franco ("Franco") was CMGT's President, Chairman and CEO and exercised day-to-day management of CMGT from November 1, 2000 until CMGT ceased operations. (Pl. 56.1 Resp. ¶ 9.) On January 31, 2000, CMGT hired Mayer Brown, a limited liability partnership engaged in the practice of law, to provide legal services "in connection with [CMGT's] initial capitalization, formative acquisition activities, and other general corporate activities" pursuant to a written engagement letter. (Pl. 56.1 Resp. ¶ 10.) According to the engagement letter, the scope of engagement could be expanded only by mutual agreement of the parties and was required to be in writing. (Pl. 56.1 Resp. ¶ 12.) The scope of engagement was never expanded in writing to include litigation. (Id.) Pursuant to the engagement letter, Mayer Brown agreed to defer payment of its fees until the closing of CMGT's initial capitalization of at least $1 million, provided that CMGT pay 125% of Mayer Brown's hourly rate. (Pl. 56.1 Resp. ¶ 11.) Mayer Brown had the right to unilaterally terminate the engagement if the attorneys' fee balance exceeded $50,000 or CMGT did not obtain capitalization by May 1, 2000. (Id.) If CMGT never found capitalization, it would not be required to pay attorneys' fees but would be required to pay Mayer Brown's out-of-pocket expenses. (Id.)

In June of 2001, CMGT retained Spehar Capital ("SC"), a venture capital consulting firm operating as a California limited liability corporation, to assist in securing $2 million in financing to fund CMGT's initial operations. (Pl. 56.1 Resp. ¶¶ 13, 15.) Robert Gerard Spehar, known as Gerry Spehar ("Spehar"), was the sole owner, officer, and employee of SC. (Pl. 56.1 Resp. ¶ 14.) CMGT's agreement with SC was set forth in a written agreement (the "Agreement"). (Pl. 56.1 Resp. ¶ 16.) Under the Agreement, SC was to receive a fee of 6% of the amount of any financing transaction if a transaction closed and the party supplying the financing was listed on Exhibit A to the agreement. Exhibit A comprised those parties SC introduced to CMGT or the parties with whom SC was permitted to hold discussions. (Pl. 56.1 Resp. ¶ 17.) If the transaction closing was for one million or more in financing, SC was entitled to additional compensation such as stock, investment banking rights, and a $100,000 management fee. (Id.)

The "Trautner Deal"

Three years after entering into the engagement letter with Mayer Brown and having not secured any financing, CMGT was in desperate financial condition. (Pl. 56.1 Resp. ¶¶ 18-19.) In May of 2003, however, Charles W. Trautner ("Trautner"), a shareholder in CMGT, proposed a deal to finance CMGT (the "Trautner Deal"), the terms of which he set forth in a letter of intent. (Pl. 56.1 Resp. ¶ 26; Def. 56.1 Reply ¶ 6.) Pursuant to the letter of intent, a new, yet-to-be-formed corporation called Newco would acquire CMGT's assets in exchange for either 20% of Newco's stock or $500,000 in cash. (Pl. 56.1 Resp. ¶ 27; Def. 56.1 Reply ¶ 4.) According to the letter of intent, Newco would not acquire CMGT's liabilities. (Pl. 56.1 Resp. ¶ 29.) Additionally, Newco would negotiate with Mayer Brown to reimburse it for a certain percentage of their unpaid legal fees. (Pl. 56.1 Resp. ¶ 30.)

Franco sent a letter to CMGT's shareholders recommending that they approve the Trautner Deal and stating that he believed it was the only viable option for CMGT's survival. (Pl. 56.1 Resp. ¶ 31; Def. 56.1 Reply ¶ 9.) At the same time, however, he continued to pursue a second financing option-an investment from the Washoe Tribe, brought to his attention by Spehar. (Pl. 56.1 Resp. ¶ 22.) In August of 2003, all CMGT shareholders who voted approved the Trautner Deal and chose to accept 20% of Newco's stock as compensation. (Pl. 56.1 Resp. ¶ 32.)

SC Files a Lawsuit Against CMGT

Trautner was not listed on Exhibit A of the SC Agreement. (Pl. 56.1 Resp. ¶ 33.) Nonetheless, when Spehar learned of the Trautner Deal, he sent a letter to Franco setting out his basis for believing his company played a role in CMGT's involvement with Trautner and arguing that Trautner should be added to Exhibit A of the Agreement. (Pl. 56.1 Resp. ¶ 35.) CMGT disagreed with SC's right to compensation for the deal. (Pl. 56.1 Resp. ¶ 36.)

Disgruntled with CMGT's refusal to pay him, SC sued CMGT in California state court (the "California lawsuit") on September 9, 2003. (Pl. 56.1 Resp. ¶ 38.) SC sought specific performance of its contract with CMGT and specifically sought to block the Trautner Deal. (Id.) SC obtained an ex parte temporary restraining order ("TRO") on September 12, 2003 that, among other things, prohibited CMGT from closing the Trautner Deal or taking further steps toward consummating any other transactions "whose terms do not comply with all terms of the [Agreement]." (Pl. 56.1 Resp. ¶ 39.; R. 138, Compl., Ex. 15.) Spehar sent Given a copy of the TRO documents on September 16, 2003. (Pl. 56.1 Resp. ¶ 40; Def. 56.1 Reply ¶ 53.) Thereafter, Given sent an email to Franco and CMGT's shareholders attaching the TRO documentation, notifying them that SC had obtained the TRO prohibiting CMGT from closing the Trautner Deal, and stating that Mayer Brown had not been and did not expect to be retained to assist CMGT in the California lawsuit. (Pl. 56.1 Resp. ¶ 41; Def. 56.1 Reply ¶ 54.) The TRO documents attached to the email specifically stated that the California court would hold a preliminary injunction hearing on October 3, 2003. (Pl. 56.1 Resp. ¶ 42.) CMGT did not appear at the preliminary injunction hearing and the court converted the TRO into a preliminary injunction. (Pl. 56.1 Resp. ¶ 43.) The next day, Spehar informed CMGT via email that the court had issued the preliminary injunction. (Pl. 56.1 Resp. ¶ 44.)

In late November or early December of 2003, SC served CMGT by mail an amended complaint in the California lawsuit, this time also seeking money damages for CMGT's alleged breach of contract. (Pl. 56.1 Resp. ¶ 45.; Pl. Appx. to 56.1 Statement, Ex. 85.) CMGT did not answer the amended complaint and the California court found it in default. (Id.) The California court held a prove-up hearing on the default on February 26, 2004. (Pl. 56.1 Resp. ¶ 46.) At that hearing, Spehar argued that CMGT's acceptance of the Trautner Deal triggered certain provisions in his agreement with CMGT. (Def. Appx. to 56.1 Statement, Ex. F.) Despite the fact that Trautner was not listed on Exhibit A of the Agreement, Spehar testified that he was entitled to compensation for securing the $2.5 million infusion of capital. (Id.) Specifically, Spehar testified that he should have received: (1) a $100,000 management consulting fee; (2) a $150,000 finder's fee, which represented 6% of the $2.5 million*fn3 ; (3) $5,863 in legal expenses; (4) $11,253,627, which represented 6% of CMGT as common stock; and (5) $5,400,000 in investment banking rights. (Id.)

Spehar's estimation of the stock compensation and investment banking rights was based on a possible future initial public offering three years after the date of his testimony, (id.), despite the fact that Spehar knew at the time that CMGT "was in desperate financial condition." (Pl. 56.1 Resp. ¶ 19.) When the court asked Spehar whether CMGT was in existence, Spehar answered, "Yes, it is." (Def. Appx. to 56.1 Statement, Ex. F.) To further bolster his claims to the court, Spehar described the business of CMGT as follows:

[CMGT] own[s] a business called absence management. And just to give you a perspective on what companies, how they value this service, 51% of human resources directors in the United States . . . have a call center operation.

. . . . [CMGT has] a piece of proprietary software that integrates, CMGT has a proprietary piece of software they wrote which allows for the call center to, over the internet, integrate all of the employees and all of the disability carrier's databases on that company with a call center. So that whenever anybody calls in that's sick, that the funnel. That's the tip of the funnel from which all information flows out to all of those people. (Id.) After telling the judge that the "current valuation of my 6% would be $11,253,627," the California judge asked Spehar, "What's it worth now?" Spehar replied, "That's it-$11 million." (Id.)

Spehar knew at the time of the hearing that he had blocked the one possible infusion of capital to keep CMGT alive by obtaining the TRO that stopped the deal. He also knew that CMGT could not obtain any other infusion of capital to save the entity because his proposed TRO which was entered by the California judge prevented CMGT from consummating "any other transaction by CMGT whose terms do not comply with all terms of the CMGT-Spehar agreement." (Compl., Ex. 15) He further knew that CMGT was prevented from licensing the "valuable" software pursuant to the same TRO. (Id.)

The judge recognized that some of the damages were speculative. (See Def. Appx. to 56.1 Statement, Ex. F. ("But that one is pretty hard because nothing has happened on that yet. You could have it in your judgment that you had the right to the fee, if it ever occurs, but this may never occur.").) The judgestated that if a default judgment was issued, CMGT would come in and set it aside, and the case would start over again. (Pl. 56.1 Resp. ¶ 49.) Nevertheless, based on the misrepresentations Spehar made at the hearing, the judge entered the $17 million default judgment against CMGT.*fn4 (Pl. 56.1 Resp. ¶ 48.) Among other things, the California court also permanently enjoined CMGT from completing the Trautner Deal or any other deal "without the express written consent of Spehar Capital, LLC." (Compl., Ex. 17.)

CMGT Enters Bankruptcy

The California judgment permanently blocked the Trautner Deal and CMGT never secured financing. (Id.) Rather than being a lucrative call center coordinating America's HR directors as Spehar held it out to be, CMGT was forced to cease operations. CMGT did not pay any portion of the California default judgment. (Pl. 56.1 Resp. ¶ 50.) On August 25, 2004, Spehar filed a single creditor involuntary bankruptcy petition against CMGT in the United States Bankruptcy Court for the Northern District of Illinois (the "bankruptcy court"). (Pl. 56.1 Resp. ¶ 51.) Spehar admits that the bankruptcy action was filed for the express purpose of collecting the $17 million default judgment from Mayer Brown through a legal malpractice action. (Pl. 56.1 Resp. ¶ 52.) On September 15, 2004, the bankruptcy court entered an order of relief under Chapter 7 of the Bankruptcy Code. (Pl. 56.1 Resp. ¶ 53.)

The bankruptcy court appointed a bankruptcy trustee, David Grochocinski, and within days of the appointment, Spehar, through counsel Mr. Todhunter,*fn5 ("Todhunter") approached Grochocinski about filing a legal malpractice action against Defendants. (Pl. 56.1 Resp. ¶ 54; Def. Appx. to Rule 56.1 Statement, Ex. J at 368:16-20.) Spehar informed Grochocinski that such an action would be based on Defendants' failure to appear and defend CMGT in the California lawsuit. (Pl. 56.1 Resp. ¶ 54.) Spehar told Grochocinski that he wanted him to collect on the legal malpractice claim so SC, in turn, could collect the default judgment. (Pl. 56.1 Resp. ¶ 55.) Additionally, Spehar agreed to loan the estate $17,500 for bankruptcy administration costs, which included costs for bringing the claims against Defendants, and agreed to split the ...


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