The opinion of the court was delivered by: 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 and Ronald B. Given, one of its attorneys (collectively "Mayor Brown"), for legal malpractice. On March 31, 3010, this Court granted Mayer Brown's motion for summary judgment. Mayer Brown now moves for sanctions against Grochocinski and his attorneys, Edward T. Joyce and Associates ("Joyce") pursuant to the Court's inherent authority to enter sanctions and, as to Joyce, pursuant to 28 U.S.C. § 1927 as well. For the reasons stated below, the Court denies the Mayer Brown's motion as to Grochocinski and grants it in part as to Joyce.
In early 2004, Spehar Capital, LLC ("SC"), a venture capital consulting firm, secured a $17 million default judgment against CMGT in California state court. (Op. at 6-7.)*fn1 Details of the prove-up hearing testimony, as well as the facts that led to the judgment, can be found in the Court's March 31, 2010 Memorandum Opinion and Order ("March 31, 2010 Opinion"). (Doc. 171); see Grochocinski v. Mayer Brown Row & Maw LLP, No. 06 C 5486, 2010 WL 1407256 (N.D. Ill. Mar. 31, 2010). In that opinion, this Court concluded that the sole owner, officer, and an employee of SC, Gerry Spehar ("Spehar"), misrepresented the financial state of CMGT to the California court and that the judgment amount was based on these misrepresentations. (Op. at 6, 21.)
Seeking to recover the $17 million judgment, SC filed a single-creditor involuntary bankruptcy petition against CMGT in the United States Bankruptcy Court for the Northern District of Illinois. (Op. at 7; Doc. 236, Ex. A ¶ 6.) Spehar admitted that he initiated the bankruptcy proceeding for the express purpose of collecting the $17 million default judgment from Mayer Brown through a legal malpractice action. (Op. at 7.) The bankruptcy court, at random, appointed Grochocinski, a long-time member of the bankruptcy court's panel of private trustees who had no professional expertise in the area of professional liability claims, as bankruptcy trustee for CMGT's Chapter 7 bankruptcy estate. (Op. at 8; Doc. 236, Ex. A ¶¶ 3-4.) As trustee, Grochocinski was responsible for marshaling and liquidating the assets of the CMGT estate and he had the capacity to sue parties on behalf of the estate. (Id. ¶¶ 4-5.) He received very little information about CMGT beyond the name of the bankruptcy petitioner when he was appointed. (Id. ¶ 7.)
Soon after Grochocinski's appointment, Spehar's counsel, Judson Todhunter ("Todhunter"), an attorney Grochocinski knew from law school, contacted Grochocinski about filing a legal malpractice action against Mayer Brown. (Op. at 8; Doc. 236, Ex. A ¶ 12.) Todhunter informed Grochocinski that SC, a secured creditor, was willing to provide post-petition financing and carve out funds for the unsecured creditors so that Grochocinski could investigate and bring the legal malpractice claim. (Op. at 8; Doc. 236, Ex. A ¶ 12.) Grochocinski negotiated and received approval from the bankruptcy court for a financing agreement that granted SC the majority of any proceeds recovered from the Mayer Brown. (Op. at 8; Doc. 236, Ex. A ¶ 13; Doc. 235, Ex. B.) In exchange, SC agreed to loan the estate $17,500 for bankruptcy administration costs. (Op. at 8.) Because he had no experience investigating and bringing legal malpractice and professional liability claims, Grochocinski also retained special counsel to evaluate and prosecute the legal malpractice claim. (Doc. 236, Ex. A ¶¶ 12, 17.) Spehar recommended Edward Joyce, the principal of Joyce, and an attorney experienced in legal malpractice matters. (Op. at 8; Doc. 236, Ex. A ¶¶ 15-16.) Joyce's appointment as special counsel was approved by the bankruptcy court on November 18, 2005. (Id.) Joyce agreed to represent CMGT and to prosecute any malpractice claims against the Defendants on a contingency fee. (Op. at 8; Doc. 236, Ex. A ¶ 17.)
Once Joyce was appointed as special counsel, Grochocinski took little part in the investigation and prosecution of the legal malpractice claim against the Defendants. (Op. at 9-13; Doc. 236, Ex. A ¶ 18.) According to Grochocinski, "[o]ther than providing [Joyce] with information from my file, I took no part in investigating the salient facts pertaining to the legal malpractice claim." (Id.) This is true despite the fact that many CMGT shareholders contacted him with information contrary to what Spehar had told him and Joyce. (Op. at 9; Doc. 236, Ex. A ¶ 28.) Grochocinski did little research on vacating the California state court judgment and made no attempt to vacate it. (Op. at 8-9; Doc. 236, Ex. A ¶ 10.)
Before filing this lawsuit, Joyce reviewed "contemporaneous documents," many of which were written by a Mayer Brown attorney and CMGT shareholders. (Doc. 235 at 2, 29.) He also sent CMGT shareholders letters requesting interviews and threatening litigation if they refused to sign the attached tolling agreements. (Op. at 13; Doc. 235 at 28.) Joyce did not, however, interview any CMGT shareholders, officers, or directors, or anyone from Mayer Brown before deciding to bring this case. (Id. at 28-29.) In contrast, Joyce was well-versed in Spehar's version of events, and Joyce knew from the beginning of its appointment that Spehar wanted to collect SC's $17 million judgment through the malpractice lawsuit. (Id. at 29.)
On August 10, 2006, Grochocinski participated in a conference call with, among others, Joyce, Spehar, and Todhunter. (Doc. 236, Ex. A ¶ 19.) At the call, Joyce informed the parties that there was sufficient factual and legal basis for bringing a legal malpractice claim against the Defendants. (Id.) Relying on this information, Grochocinski approved the filing of this case. (Id.) He also reviewed the complaint drafted by Joyce, but, according to Grochocinski, because he was "not involved in the events described in the complaint nor did [he] personally conduct the investigation, nor [is he] versed in the law of legal professional liability, [he] had no basis to question the content of the complaint and the advice that the lawsuit be filed." (Id. ¶ 20.)
In late August of 2006, Joyce filed a two-count Complaint against the Defendants in the Circuit Court of Cook County, Illinois, which Mayer Brown removed to this Court. In Count I, Grochocinski alleged that Mayer Brown provided negligent advice to CMGT. Among other things, Count I alleged that Mayer Brown failed to advise CMGT to settle its dispute with SC before the dispute escalated to litigation and, as a result, CMGT lost any hope of obtaining financing for its operations. In Count II, Grochocinski alleged that Mayer Brown failed to defend CMGT, and advised CMGT not to appear in the California lawsuit, and as a result, the California court entered a $17 million default judgment against CMGT.
The Court granted in part and denied in part Mayer Brown's motion to dismiss. First, the Court determined that Grochocinski could not recover for Mayer Brown's alleged failure to advise CMGT that SC would sue and Mayer Brown's alleged failure to provide legal advice to CMGT's shareholders. Nevertheless, the Court denied the motion as to all other grounds. Specifically, the Court found Mayer Brown's "unclean hands" argument premature. It concluded that SC, who is not a party to this action, was the entity that Mayer Brown alleged perpetrated a fraud on the judicial system, and that, at that point, Mayer Brown had not shown that the plaintiff in this case, Grochocinski, had done anything wrong. The Court later denied a motion to reconsider from Mayer Brown, finding that there were factual issues that needed to be resolved and that the case could not be disposed of on a motion to dismiss. The Court, however, ordered the parties to engage in discovery on only the "unclean hands" issue and, if appropriate, move for summary judgment based on that issue.
Mayer Brown chose to move for summary judgment on the "unclean hands" issue, and the Court granted that motion on March 31, 2010. Mayer Brown argued that the instant case, if successful, would yield an absurd result. Specifically, Mayer Brown pointed out that in order for Grochocinski to win, he had to prove that SC's claim in the California litigation had no merit. But then, if Grochocinski succeeded in proving malpractice, he would have to turn over "the lion's share of any recovery" to SC "whom he would have just proved had no right to recovery in the first place." (Doc. 136 at 9.) The Court found that the crux of the Mayer Brown's argument was that Grochocinski, standing in the ...