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Goldfine v. Barack, Ferrazzano, Kirschbaum and Perlman

Court of Appeals of Illinois, First District, Sixth Division

June 28, 2013

MORTON GOLDFINE and ADRIENNE GOLDFINE, Plaintiffs-Appellants and Cross-Appellees,
v.
BARACK, FERRAZZANO, KIRSCHBAUM AND PERLMAN, PETER BARACK, DENNIS FERRAZZANO, HOWARD KIRSCHBAUM, CHARLES PERLMAN, RAY RAZNER, DEBRA CAFARO, DAVID NADOFF, THOMAS PAGE, DAVID SELMER, ROBERT SHAPIRO, WENDI SLOANE WEITMAN, and JILL ANN COLEMAN, Defendants-Appellees and Cross-Appellants.

Held [*]

Plaintiffs proved their claims for a violation of the Illinois Securities Law and for legal malpractice arising from defendant law firm’s failure to preserve plaintiffs’ right to recover for the securities violation, and the award of statutory damages, attorney fees, costs and expenses was affirmed; however, the cause was remanded for application of the correct formula for calculating the mandatory statutory damages pursuant to the Illinois Securities Law, a recalculation of the award for attorney fees, and an opportunity for plaintiffs to file a petition under the Illinois Securities Law for additional attorney fees and costs for defending the appeal.

Appeal from the Circuit Court of Cook County, No. 05-L-6360; Hon. Review Dennis J. Burke, Judge, presiding.

Law Offices of Edward T. Joyce & Associates, P.C. (Edward T. Joyce and Rowena T. Parma, of counsel), and Martin J. Oberman, both of Chicago, and Steven J. Plotkin, of Evanston, for appellants.

Jenner & Block LLP, of Chicago (Jeffrey D. Colman, Barry Levenstam, and Irina Y. Dmitrieva, of counsel), for appellees.

Panel PRESIDING JUSTICE LAMPKIN delivered the judgment of the court, with opinion. Justice Reyes concurred in the judgment and opinion.

OPINION

LAMPKIN, PRESIDING JUSTICE

¶ 1 This is a legal malpractice case based on an underlying cause of action for a violation of the Illinois Securities Law of 1953 (Illinois Securities Law) (815 ILCS 5/1 et seq. (West 2010)). Plaintiffs Morton and Adrienne Goldfine brought a legal malpractice action against defendants, the law firm of Barack, Ferrazzano, Kirschbaum & Perlman (BFKP) and several partners of that law firm, to recover damages plaintiffs sustained as a result of defendants' failure to preserve plaintiffs' Illinois Securities Law cause of action against Shearson Lehman Brothers Holdings, Inc., and others.

¶ 2 The trial court found that plaintiffs proved their underlying Illinois Securities Law claim and ruled in their favor on their legal malpractice claim. The trial court awarded them statutory damages for their Illinois Securities Law claim and attorney fees, costs and expenses.

¶ 3 On appeal, plaintiffs argue that the trial court erred (1) in calculating the amount of their mandatory statutory award for damages under the Illinois Securities Law, and (2) in denying their full claim for attorney fees, costs and expenses.

¶ 4 In their cross-appeal, defendants argue that the award of interest, attorney fees and costs should be reversed because the fee-shifting and interest provisions of the Illinois Securities Law are punitive and coercive and, thus, fall within the category of damages that are barred by statute in legal malpractice actions. Defendants also argue that the trial court erred in finding that plaintiffs proved (1) their underlying Illinois Securities Law claim where Mr. Goldfine's reliance on his broker's representations concerning stock purchases was not reasonable, and (2) that defendants' legal malpractice proximately caused plaintiffs' damages.

¶ 5 For the reasons that follow, we reject defendants' argument that the award of statutory damages under the Illinois Securities Law is barred by statute in legal malpractice actions. We also affirm the trial court's findings that plaintiffs proved their underlying Illinois Securities Law claim and legal malpractice action. Further, we affirm the trial court's award of plaintiffs' costs and expenses. However, we find that the trial court failed to apply the correct mathematical formula to calculate plaintiffs' mandatory statutory award for damages under the Illinois Securities Law. Specifically, the clear and unambiguous language of section 13(A) of the Illinois Securities Law (815 ILCS 5/13(A) (West 2010)) required the circuit court to calculate plaintiffs' award of 10% interest on the full amount they had paid for the stocks at issue before the circuit court deducted the amount plaintiffs had received from a settlement. In addition, the trial court's attorney fees award was based on a percentage of the court's incorrect damage calculation. Accordingly, we reverse the trial court's award of damages and attorney fees and remand this matter to the trial court to calculate plaintiffs' section 13(A) damages consistent with this order and to determine a reasonable amount of attorney fees based on the correct amount of damages.

¶ 6 I. BACKGROUND

¶ 7 The "case within a case" on which plaintiffs' malpractice claim is predicated was plaintiffs' cause of action against Shearson Lehman Brothers Holdings, Inc. (Shearson), and other individuals and firms (the Shearson defendants) for violations of the Illinois Securities Law. That cause of action arose from plaintiffs' 12 separate purchases of First Capital Holdings (FCH) stock through Shearson broker Michael Steinberg, who was the office manager of Shearson's Peoria, Illinois, office and a close personal friend of the plaintiffs. Plaintiffs' purchases were made between 1987 and 1990 and totaled $4, 745, 254.45.

¶ 8 In the spring of 1991, FCH filed for bankruptcy, and plaintiffs' FCH stock became worthless. In 1991, plaintiffs retained the defendant law firm BFKP to: identify and evaluate plaintiffs' claims arising from their investments in FCH stock; negotiate a settlement of those claims with the Shearson defendants; and–if no settlement could be effected–preserve plaintiffs' claims until they retained a contingent-fee lawyer to file suit. BFKP did not achieve a settlement of plaintiffs' claims.

¶ 9 When plaintiffs retained BFKP, plaintiffs had a viable claim against the Shearson defendants for rescission under the Illinois Securities Law. The Illinois Securities Law mandates that victims of securities fraud are entitled to recover their entire stock purchase price, plus 10% interest on that purchase from the date of the purchases to the date of judgment, plus their attorney fees, costs and expenses. 815 ILCS 5/13(A) (West 2010). However, in order to bring that Illinois Securities Law claim, the purchaser must serve a notice of rescission within six months of learning of his right to this statutory remedy. 815 ILCS 5/13(B) (West 2010). BFKP, however, never served the rescission notice, never advised plaintiffs to do so, and never sought to toll the time to serve the rescission notice.

¶ 10 In 1992, plaintiffs hired new counsel to prosecute their claims against the Shearson defendants in the underlying case. Although plaintiffs' complaint included the Illinois Securities Law claim, that claim was dismissed by the trial court as time-barred, and that dismissal was ultimately affirmed on appeal. Goldfine v. Steinberg, No. 1-00-1004 (2004) (unpublished order under Supreme Court Rule 23). Meanwhile, in 1994, plaintiffs filed the instant malpractice action against defendants BFKP and its partners to recover the damages plaintiffs would have recovered under the Illinois Securities Law if defendants' negligence had not barred plaintiffs from pursuing their Illinois Securities Law claim. In 1996, while the underlying Steinberg case was pending, a stipulated order was entered that delayed the malpractice trial until after the resolution of the Steinberg case.

¶ 11 In 1999, the trial court dismissed plaintiffs' remaining claims in the Steinberg case, and plaintiffs appealed. In 2004, this court remanded to the trial court two of plaintiffs' claims against the Shearson defendants–common law fraud and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 2004)). In 2007, plaintiffs settled their non-Illinois Securities Law claims in the underlying Steinberg case for $3.2 million.

¶ 12 Thereafter, this malpractice case proceeded to a bench trial. The trial court heard both plaintiffs' "case within a case" claim under the Illinois Securities Law and their malpractice claim against BFKP and its partners for failing to preserve the Illinois Securities Law claim in the underlying Steinberg case. Over nearly eight weeks, the court heard numerous witnesses, both live and videotaped, and through deposition testimony, and the parties introduced voluminous exhibits.

¶ 13 On July 12, 2010, the trial court ruled that, after the plaintiffs' first purchase of FCH stock, the Shearson defendants violated the Illinois Securities Law concerning plaintiffs' next 11 FCH stock purchases. The trial court accepted and credited Mr. Goldfine's testimony and found that plaintiffs were entitled to relief under Section 13(A) of the Illinois Securities Law. The court also heard extensive testimony from the defendant lawyers who had handled plaintiffs' representation and expert witnesses for both sides. The court found that BFKP had breached its duties to plaintiffs by negligently failing to carry out its assignment to preserve plaintiffs' Illinois Securities Law claim and that the loss of that claim had been caused by BFKP's negligent conduct. The trial court ruled that plaintiffs' damages would be calculated according to the following formula: plaintiffs' $3.2 million settlement would be deducted from the total they had paid for their 11 stock purchases, and then 10% interest would be calculated on the remaining amount based on the various dates of those stock purchases. The court ordered the parties to calculate the exact amount to enter in a judgment order, ordered plaintiffs to prepare the judgment order, and gave plaintiffs leave to file their petition for attorney fees.

¶ 14 Plaintiffs moved the court to modify or clarify its July 2010 order. Plaintiffs argued, inter alia, that the trial court's damage calculation formula was erroneous and contrary to precedent as set forth in Kugler v. Southmark Realty Partners III, 309 Ill.App.3d 790 (1999). Thereafter, the parties filed briefs on the damage calculation issue and various motions and responses concerning plaintiffs' petition for attorney fees. On September 22, 2010, after argument was held on plaintiffs' motion to modify the July 2010 order, the trial court denied plaintiffs' motion and ordered them to file their petition for attorney fees and costs. Specifically, the trial court stated that this legal malpractice case was "very unique" and distinguishable from Kugler. Moreover, the trial court agreed with the special concurrence in Kugler and thought it would be a windfall and unfair to defendants to apply the Kugler damage calculation formula in the instant case. Accordingly, the trial court adopted defendants' damage calculation and held that the court would wait for plaintiffs' petition for attorney fees and costs before entering judgment.

¶ 15 After argument was held on plaintiffs' petition for attorney fees, costs and expenses, the trial court ruled, on May 17, 2011, that a contingency fee of 40% of the recovered amount was reasonable. The court stated that plaintiffs' counsel would have received a contingency fee pursuant to their retainer agreement and it was difficult to separate the time plaintiffs' counsel had allotted to either the malpractice or Illinois Securities Law claim. The court denied costs and expenses to one of plaintiffs' counsel because the court could not "determine the specific nature of the costs and whether the costs specifically pertained to this case." The court, however, granted in full costs and expenses to the plaintiffs' other counsel.

¶ 16 On May 24, 2011, the trial court entered judgment in this case and adopted the securities purchase price and interest calculation proposed by defendants. Specifically, the trial court took the sum of $4, 506, 602.05, which represented the total amount of plaintiffs' 11 stock purchases made in 1988, 1989 and 1990, and deducted $3.2 million, which was the amount of the 2007 Steinberg settlement. However, because those stocks were purchased on 11 different dates, the trial court applied a "proportionate reduction of $3, 200, 000.00 (71.00693%)" to each purchase to obtain a "net" purchase price for each of the 11 stock purchases. The total sum of those net purchase prices was $1, 306, 602.29. Using the net purchase price for each of the 11 purchases and the corresponding date of sale for each purchase, the trial court then calculated a 10% annual interest award, through May 24, 2011, of $2, 785, 149.91. This resulted in a total section 13(A) award, before attorney fees, costs and expenses, of $4, 091, 752.19. Furthermore, the trial court awarded plaintiffs attorney fees of 40% on the $4, 091, 752.19 award, or $1, 636, 700.80, and $207, 167.28 in costs and expenses. Accordingly, the court entered a total award of $5, 935, 620.10 in favor of plaintiffs and against defendants.

¶ 17 Plaintiffs appealed, contending the trial court failed to calculate their statutory damages according to the mathematical formula in section 13(A) of the Illinois Securities Law. Plaintiffs also argue the trial court erred by failing to award reasonable attorney fees, expenses and costs. Defendants cross-appealed, contending that the award of interest, attorney fees and costs should be reversed because the fee-shifting and interest provisions of section 13(A) are punitive and coercive and, thus, fall within the category of damages that are barred by statute in legal malpractice actions. Defendants also argue that the trial court erred in finding that plaintiffs proved their underlying Illinois Securities Law claim where Mr. Goldfine's reliance on his broker's representations concerning stock purchases was not reasonable, and where plaintiffs failed to prove that any malpractice proximately caused any damage.

¶ 18 II. ANALYSIS

¶ 19 A. Calculation of Section 13(A) Damages

¶ 20 Plaintiffs argue that the trial court misapplied the section 13(A) damage formula when the court deducted from plaintiffs' stock purchase price the $3.2 million settlement plaintiffs had received in 2007 from the Steinberg case before the court calculated the mandatory 10% annual interest. We agree.

¶ 21 "A legal malpractice plaintiff is entitled to recover those sums which would have been recovered if the underlying suit had been successfully prosecuted." Weisman v. Schiller, Ducanto & Fleck, 314 Ill.App.3d 577, 580 (2000). Here, the trial court found that plaintiffs proved their "case within a case, " i.e., that they would have prevailed on their Illinois Securities Law claim against the Shearson defendants and were entitled to statutory damages pursuant to section 13(A) based on $4, 506, 602.05 in FCH stock purchases. Section 13(A) provides, in pertinent part:

"A. Every sale of a security made in violation of the provisions of this Act shall be voidable at the election of the purchaser; and the issuer, controlling person, underwriter, dealer or other person by or on behalf of whom said sale was made, and each underwriter, dealer or salesperson who shall have participated or aided in any way in making the sale, and in case the issuer, controlling person, underwriter or dealer is a corporation or unincorporated association or organization, each of its officers and directors (or persons performing similar functions) who shall have participated or aided in making the sale, shall be jointly and severally liable to the purchaser as follows:
(1) for the full amount paid, together with interest from the date of payment for the securities sold at the rate of the interest or dividend stipulated in the securities sold (or if no rate is stipulated, then at the rate of 10% per annum) less any income or other amounts received by the purchaser on the securities, upon offer to tender to the seller or tender into court of the securities sold or, where the securities were not received, of any contract made in respect of the sale; or
(2) if the purchaser no longer owns the securities, for the amounts set forth in clause (1) of this subsection A less any amounts received by the purchaser for or on account of the disposition of the securities." (Emphases added.) 815 ILCS 5/13(A) (West 2010).

The issue here is the proper interpretation of the Illinois Securities Law, which is a question of law and, thus, reviewed by this court de novo. Woods v. Cole, 181 Ill.2d 512, 516 (1998).

¶ 22 In construing the statute, the court must look primarily to the words of the statute as evidence of the legislature's intent. Lemont-Bromberek Combined School District No. 113(a) v. Walter, 279 Ill.App.3d 847, 849 (1996). Judicial construction is only necessary when the statute is unclear or ambiguous. Buckellew v. Board of Education of Georgetown-Ridge Farm Community Unit School District No. 4, 215 Ill.App.3d 506, 511 (1991). The court must construe the statute as it is and, regardless of the court's opinion regarding the desirability of the results surrounding the operation of the statute, the court "may not, under the guise of construction, supply omissions, remedy defects, annex new provisions, substitute different provisions, add exceptions, limitations, or conditions, or otherwise change the law so as to depart from the plain meaning of the language employed in the statute." Id.

¶ 23 This court previously construed section 13(A) of the Illinois Securities Law in Kugler, 309 Ill.App.3d 790. The trial court in Kugler found that the broker defendants were liable under the Illinois Securities Law to the class of plaintiffs who had purchased securities during the years of 1985 and 1986. Id. at 792. On May 11, 1998, the trial court entered judgment for plaintiffs in the amount of $902, 759.48, pursuant to section 13(A) of the Illinois Securities Law. Id. at 793. On appeal, the defendants challenged the trial court's calculation of damages, contending the trial court had failed to deduct $2, 952.05 in accrued interest and $12.50 in sale proceeds from the damages where two class members, who originally paid in excess of $7, 000 for the securities, sold them for $12.50 on December 31, 1995. Id. at 793, 798.

¶ 24 The majority opinion in Kugler found that the clear and unambiguous language of section 13(A) provided that the statutory damages were calculated as the full amount the purchaser had paid for his securities, plus accrued interest from the date of payment of the securities at 10% per annum, less any income or other amounts received upon the disposition of the securities. Id. at 797. Although the majority opinion thought "a purchaser who sells his securities should be entitled only to interest up to the date of sale and not beyond, " the majority would not "depart from the plain meaning of the statute" and could not "supply omissions, remedy defects, or otherwise change the law." Id. at 797-98. See also Ryon M. McCabe, Statutory Damages Under the Florida Securities and Investor Protection Act: How to Calculate and Apply Rescission Damages, 83 Fla. B. J. 32, 33-36 (October 2009) (citing Kugler and noting that Illinois, like Florida, provides a unique measure of statutory rescission damages and powerful tool for investors that differs from traditional compensatory or out-of-pocket damages); 12A Joseph C. Long, Blue Sky Law § 9:15 n.10 (June 2010) (noting that the statutes in Florida, Illinois and Texas do not require a deduction of interest earned on the proceeds of the sale of the original securities).

¶ 25 The special concurrence in Kugler disagreed with the majority's interest calculation, finding it to "constitute a windfall and an effective double recovery to the purchaser." Kugler, 309 Ill.App.3d at 798 (Gordon, J., specially concurring). The special concurrence argued that interest should be charged against the original purchase price up to the time the security is resold. Once the security is resold, interest should be charged up to the date of judgment based on the difference between the original purchase price and the amount recouped on the resale. Id. According to the special concurrence, the language of section 13(A)(2) releases the seller of the securities from any obligation to repay the amount the purchaser recovered on any resale and, thus, it "naturally follows that the interest obligation is correspondingly diminished." Id. at 799. Nevertheless, the special concurrence thought the amount of money in dispute was de minimus and did not warrant a remand or adjustment. Id. The calculation formula preferred by the special concurrence seems to be: damages = (original purchase price statutory interest from purchase to judgment date - any income received on the securities) - (value of securities when resold statutory interest from resale to judgment date). The special concurrence's formula would supply a mechanism, which is not provided in the clear language of the statute, to reduce a damage award by the amount of interest earned on the proceeds of a resale.

¶ 26 To support the proposition that section 13(A) did not need to be construed to include interest on the proceeds of the resale, the special concurrence relied on a dictionary definition of the word "interest" as a " 'price paid for borrowing money generally expressed as a percentage of the amount borrowed paid on one year.' " Id. (quoting Webster's Third New International Dictionary 1178 (1993)). The special concurrence contended that because a 13(A) damage award is reduced by any money recovered on resale, the amount borrowed or principal for purposes of calculating 13(A) interest must also reflect that reduction. Id. The special concurrence's rationale, however, is not persuasive. Section 13(A) does not address situations involving borrowed money but, rather, the sale of securities in violation of securities law. Accordingly, the more apt definition for interest here is "an excess over and above an exact equivalent." Webster's Third New International Dictionary 1178 (1993); see also Black's Law Dictionary 816 (7th ed. 1999) (defining interest as the "compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use").

¶ 27 To the extent that any accrued interest results in a surplus award to a plaintiff, the clear language of the statute indicates that the legislature chose not to permit the liable defendant to reap the benefits of the plaintiff's good fortune in obtaining income on the securities gratuitously or the plaintiff's efforts to minimize the harm done by the defendant. In choosing who should receive any windfall from a surplus interest award, i.e., compensation over and above that necessary to compensate the plaintiff for injuries sustained by the defendant's tortious conduct, the legislature deemed the plaintiff far more deserving than the defendant. The legislature, however, curtailed any double recovery by requiring the amount of any resale or income received on the securities to be deducted from the 13(A) damage award. The legislature could have easily required any surplus interest award to also be offset but chose not to do so. Even if we were so inclined, we are in no position to bring about such a change.

¶ 28 Here, the trial court cited the Kugler special concurrence to support the interest calculation used in the instant case. However, the trial court's attempt to apply the formula suggested by the Kugler special concurrence, which addressed a situation involving the resale of securities, to the instant situation, which concerns the deduction of a settlement award, reveals the erroneous reasoning underlying the special concurrence's position. When the situation involves a resale of securities, like in Kugler, a deduction to the interest calculation based on the difference between the original purchase price and the amount recouped on the resale would remedy fairly easily a perceived statutory defect or omission in the Illinois Securities Law concerning a purported failure to deduct interest on the proceeds of the resale. The instant case, however, establishes that a court, under the guise of statutory construction, must significantly revise the clear statutory language of section 13(A) to effectuate the accrued-interest policy concerns raised by the defendants, trial court and partial dissent here and the Kugler special concurrence.

¶ 29 Here, 11 stock purchases were made on 11 different dates during 1988, 1989 and 1990, and the original purchase prices ranged from as low as $13, 106.44 on May 20, 1988, to as high as $1, 184, 940.25 on February 23, 1990. Between 17 and 19 years elapsed from the dates plaintiffs had purchased the stocks to the date they received the $3.2 million settlement from the Shearson defendants in 2007. Over three more years elapsed before plaintiffs received the judgment in this malpractice action against defendants for their negligent failure to preserve plaintiffs' Illinois Securities Law claim against the Shearson defendants. Due to securities violations and legal malpractice, plaintiffs were denied the use of over $4.5 million for about 20 years. Under these circumstances, why should the 2007 $3.2 million settlement reach back almost 20 years to be deducted from plaintiffs' original purchase price and thereby cut off their entitlement under the statute to accrued interest? Although the trial court thought it would be fair in 2010 to apply the 2007 $3.2 million settlement to each purchase price as a proportionate reduction (see supra ¶ 16), there is absolutely no statutory basis for the court to exercise that discretion. Moreover, if the legislature had intended to require a deduction of interest earned on the proceeds of a resale or other recovered amounts, the legislature was surely capable of drafting that requirement into the statute or amending the statute after Kugler was issued.

¶ 30 Like the Kugler majority, we cannot depart from the plain meaning of the statute, which provides that the 10% interest is calculated on the full amount paid for the securities before deductions are made for any income or amounts received by the purchaser on the securities. Consequently, we find that the trial court erred when it deducted the $3.2 million settlement from the total purchase price before calculating the interest. Accordingly, we reverse the trial court's judgment concerning the damage calculation and remand this matter for an adjustment of plaintiffs' damages in accordance with this order. Here, the full amount of the purchase price on the 11 stock purchases at issue was $4, 506, 602.05. According to plaintiffs, the correct interest calculation on that amount, which must account for the 11 different dates of purchase of those stocks, at 10% annually from the date of payment for the shares until the July 12, 2010 order by the trial court should have been $9, 230, 916.38, for a total of $13, 737, 518.43. Then, the $3.2 million 2007 settlement should have been deducted from $13, 737, 518.43, for a damage award of $10, 537, 518.43. Although the trial court used the wrong purchase price and interest calculation, the trial court correctly ruled that the 10% interest calculation had to be updated through the date of the final judgment on May 24, 2011. Because this court has ruled in plaintiffs' favor concerning the interest calculation, the $9, 230, 916.38 interest calculation must be updated again.

¶ 31 Plaintiffs also argue that the trial court should not have deducted the entire $3.2 million settlement from plaintiffs' damage award because they actually received only $1, 657, 000 of that settlement where they expended $1, 543, 000 in costs and attorney fees in order to obtain that settlement. We disagree. In the underlying Steinberg case, plaintiffs and the Shearson defendants entered a settlement agreement after plaintiffs' Illinois Securities Law claim was dismissed as time-barred and that dismissal was affirmed on appeal. The release in the Steinberg case provided that plaintiffs released any and all claims against the Shearson defendants that related to any of the matters alleged in their underlying lawsuit, or their account with the Shearson defendants, or their investments in the common stock of FCH. However, the release expressly provided that nothing therein affected plaintiffs' right to pursue their legal malpractice claims. Applying the plain language of section 13(A), the $3.2 million plaintiffs received in the settlement of their ...


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