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Mda City Apartments LLC v. Dla Piper Llp (Us

March 22, 2012

MDA CITY APARTMENTS LLC,
PLAINTIFF-APPELLEE AND THIRD-PARTY DEFENDANT,
v.
DLA PIPER LLP (US),
DEFENDANT-APPELLANT AND THIRD-PARTY PLAINTIFF (VILLAGE GREEN COMPANIES AND KENT MAYNARD AND ) ASSOCIATES LLC, PLAINTIFFS AND THIRD-PARTY DEFENDANTS).



Appeal from the Circuit Court of Cook County No. 08 L 05113 Honorable Daniel J. Pierce, Judge Presiding.

JUSTICE STERBA delivered the judgment of the court, with opinion.

Presiding Justice Lavin and Justice Pucinski concurred in the judgment and opinion.

OPINION

¶ 1 Defendant-appellant DLA Piper LLP (DLA) represented plaintiff-appellee MDA City Apartments LLC (MDA) in arbitration proceedings and a declaratory judgment action against Walsh Construction Company (Walsh) arising from a contract dispute. Walsh filed motions to disqualify DLA as MDA's counsel on conflict of interest grounds in both proceedings. MDA subsequently filed a legal malpractice action against DLA. During the discovery phase of the malpractice proceedings, DLA objected to MDA's requests to produce communications between DLA attorneys and both in-house and outside counsel related to Walsh's motions to disqualify and MDA's malpractice claims against DLA, on the grounds that the communications were protected by attorney-client privilege. The circuit court granted MDA's motion to compel and ordered DLA to produce the communications in question. DLA declined to comply with the production order and was held in contempt and assessed a $100 fine. On appeal, DLA contends that the communications in question are protected by the attorney-client privilege and that the fiduciary-duty exception does not apply. For the following reasons, we reverse the order of the circuit court and remand for further proceedings.

¶ 2 BACKGROUND

¶ 3 In 2003, MDA acquired the building located at 185 North Wabash Avenue in Chicago with the intent of converting it into a luxury residential apartment building with two commercial retail spaces on the first floor. DLA was engaged as legal counsel to represent MDA in connection with the acquisition and financing of the property, contract negotiations with the general contractor, construction issues, and certain litigation or arbitration proceedings involving the property. MDA retained Walsh as a preconstruction consultant in 2003 and subsequently executed a contract with Walsh for the renovation of the property.

¶ 4 Disputes arose between MDA and Walsh during renovation and MDA informed DLA that Walsh had breached its contract in various ways. The alleged breaches included Walsh's failure to adequately staff the renovation, delays in "critical path" items such as establishing elevator service and failure to notify MDA of the delays, submission of poorly documented and unreasonable change orders, refusal to provide MDA with copies of subcontractor contracts, failure to adhere to quality standards, and failure to achieve substantial completion on time. On December 6, 2005, DLA sent MDA a memo advising MDA of its options regarding the withholding of payment from Walsh. The memo advised MDA of Walsh's possible responses to withholding payment, and noted that Walsh's likely response would be to record mechanics' liens on the property and also allow subcontractors to record such liens. On December 20, 2005, DLA sent Walsh a letter on behalf of MDA, advising Walsh that MDA was exercising its contractual right to withhold payment. On December 21, 2005, Walsh recorded a mechanic's lien on the property in the amount of $6.5 million. The lien was subsequently increased to $9 million.

¶ 5 Following additional correspondence between DLA and Walsh in an attempt to resolve the dispute, DLA advised Walsh on March 14, 2006, that MDA was terminating its contract with Walsh. On March 23, 2006, DLA sent MDA an e-mail in which DLA recommended filing a complaint for declaratory judgment against Walsh and an arbitration demand, preferably simultaneously. On March 28, 2006, Walsh initiated arbitration claims against MDA, seeking damages from MDA in excess of $9.5 million. On behalf of MDA, DLA filed a complaint for declaratory judgment against Walsh in the circuit court of Cook County (chancery action) on April 28, 2006.

¶ 6 DLA advised MDA in a letter dated June 6, 2006, that it had received courtesy notice from Walsh's counsel of Walsh's intent to file a motion to disqualify DLA as MDA's counsel. The letter informed MDA that DLA suspected the basis for the motion would be the fact that Walsh Construction is affiliated through a purported common ownership with Walsh Investors, for whom DLA had done work. The letter further stated that although DLA had represented Walsh Investors in other transactions, neither Walsh Construction nor Walsh Investors had ever claimed a conflict of interest in matters in which DLA was adverse to Walsh Construction. The letter speculated that it was only after DLA filed the chancery action that Walsh made the tactical decision to raise the conflict of interest issue. The letter stated that DLA would vigorously defend the motion to disqualify, and, given that the basis for the motion was an alleged conflict involving DLA, would not charge MDA any legal fees incurred in connection with arguing the motion.

¶ 7 Walsh filed a motion to disqualify DLA as counsel in the chancery action on June 15, 2006, and filed a similar motion in the arbitration proceedings. In addition to consulting with its in-house counsel, William Campbell, regarding the motions to disqualify, DLA hired the law firm of Quinlan & Carroll Ltd. (Quinlan) in July 2006 to represent DLA on those motions. Walsh also filed a motion to dismiss, or in the alternative, to stay the proceedings in the chancery action. On September 19, 2006, the circuit court granted the motion to stay, deferring a ruling on the substantive issues in the chancery action until completion of the arbitration proceedings. On October 16, 2006, DLA filed an arbitration demand against Walsh, seeking $20 million in damages. A preliminary arbitration hearing was held on January 2, 2007, and a scheduling order was entered on January 12, 2007, setting the commencement of arbitration hearings for October 1, 2007.

¶ 8 In the meantime, following discovery and briefing on the motion to disqualify in the chancery action, the circuit court heard arguments on the motion on July 18, 2007. On August 6, 2007, the circuit court granted the motion to disqualify DLA from representing MDA in the chancery action. The circuit court found that because DLA represented Matt Walsh and Dan Walsh, the owners of Walsh Construction, DLA previously represented Walsh. The circuit court further found that because of its representation of the Walsh brothers, DLA had confidential information relating to the litigation strategies of Walsh that would impact its ability to negotiate a settlement between Walsh and MDA. On August 14, 2007, the arbitration panel granted Walsh's motion to disqualify in the arbitration proceedings. MDA retained the law firm of Sonnenschein Nath & Rosenthal LLP on August 24, 2007, as substitute counsel for DLA.

¶ 9 On May 8, 2008, MDA filed a legal malpractice action against DLA. MDA's second amended complaint was filed on October 22, 2009. It included counts for legal malpractice, fraudulent concealment, and an accounting and forfeiture of attorney fees. MDA alleged that DLA committed legal malpractice by providing negligent advice on the construction contract with Walsh and on Walsh's performance as general contractor, by failing to disclose conflicts of interest, and by failing to adequately prepare for the arbitration. In its answer to the second amended complaint, DLA admitted that it did not advise MDA of its representations of other entities owned by the Walsh brothers. DLA stated that it did not believe it had any potential or actual conflicts of interest because its representation of other Walsh-owned entities was not related to MDA's renovation of the property. In its answer, DLA also stated as an affirmative defense that MDA informed DLA that MDA had retained the law firm of Kent Maynard & Associates to represent MDA in the arbitration proceedings and the chancery action, and also informed DLA that its role in those proceedings would be limited.

¶ 10 During discovery, DLA produced its conflicts resolution file. MDA also deposed a member of DLA's conflicts department. In addition, DLA produced a privilege log delineating e-mail communications between DLA attorneys and Campbell from May 2006 through July 2009, and between DLA attorneys and Quinlan from September 2006 through August 2007. DLA subsequently produced two of the documents listed on the privilege log. MDA filed a motion to compel DLA to produce the remaining 55 communications. MDA argued that the documents were not protected by the attorney-client privilege because of the fiduciary-duty exception to that privilege. DLA attached Campbell's affidavit to its motion in opposition. Campbell stated that his primary responsibility was to act as in-house counsel to DLA and that he no longer actively represented clients of the firm. He stated that his communications with attorneys at DLA related to the motion to disqualify, the ruling on the motion to disqualify, and the threatened litigation by MDA.

ΒΆ 11 At a hearing on the motion to compel on March 10, 2011, the circuit court stated that as long as an attorney represents a client, the client is entitled to communications the attorney has with in-house and outside counsel related to issues involving the client. On March 14, 2011, the circuit court entered an order granting the motion to compel DLA to produce the 55 documents for the reasons stated in open court, holding DLA in ...


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