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Short v. Grayson

United States District Court, N.D. Illinois, Eastern Division

March 14, 2017

Charles F. Short III, Plaintiff,
v.
Brad S. Grayson; Sean M. Nelson; Strauss & Malk, LLP; Joseph J. Siprut; Aleksandra M.S. Vold; Siprut, PC; Ted Donner, Defendants.

          MEMORANDUM OPINION AND ORDER

          Honorable Thomas M. Durkin United States District Judge

         Charles Short alleges that Defendants committed legal malpractice during their representations of him in an underlying lawsuit. R. 32. Four of the defendants-Ted Donner, Brad Grayson, Sean Nelson, [1] and Strauss & Malk, LLP- have moved to dismiss Short's claims against them for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).[2] R. 40; R. 42. For the following reasons, both motions are granted in part and denied in part.

         Legal Standard

         A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g., Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). A complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with “fair notice” of the claim and the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard “demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While “detailed factual allegations” are not required, “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “‘A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'” Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Mann, 707 F.3d at 877.

         Background

         I. The Underlying Dispute

         Short formed Mobile Information Systems (“MIS”) in 1994 with two other shareholders. R. 32 ¶ 31. MIS's principle assets were patents developed by Short (the “Patents”). Id. ¶ 32. MIS filed for bankruptcy in 2000. Id. ¶ 36.

         Short and his two partners from MIS formed Sidewinder Holdings, Ltd. (“Sidewinder”) in 2001 with a new investor, defendant Ian Pye. Id. ¶ 39. Sidewinder then purchased the Patents from the MIS bankruptcy estate. Id. ¶ 43. Short and Pye managed Sidewinder along with a former MIS employee, George Best, who also eventually became a Sidewinder director. Id. ¶¶ 40, 45-46. Pye owned 50% of Sidewinder through his company Meridian. Id. ¶ 42. Short owned 34%, and Best and the two other former MIS shareholders collectively owned 16%. Id. ¶ 42.

         Sidewinder was “largely financed” by a loan from Pye's company Meridian. Id. ¶ 48. This loan was refinanced several times, resulting in Pye increasing his ownership stake in Sidewinder and eventually giving him a controlling interest. Id. ¶¶ 49, 51. By taking a controlling interest in Sidewinder, Pye was able to push Short out of management and install Anthony Hughes and Rochelle Slater, who were also employees of Meridian, as Sidewinder officers and directors. Id. ¶¶ 52-58.

         Short alleges that once Pye took control of Sidewinder he began to further encumber it financially while at the same time failing to pursue profitable uses of the Patents or defend them in court. Id. ¶¶ 52, 56, 83-86. In 2005, Short and Pye negotiated for a possible sale of the Patents to Short. Id. ¶¶ 87-90, 102-06. However, on January 5, 2006, Pye told Short that he could not sell him the Patents because he already had sold them to an “unrelated industry company” in December 2005 for $3 million. Id. ¶ 120. Pye refused to identify the company, citing a confidentiality agreement. Id. ¶ 121.

         Pye told Short that the profits from the sale of the Patents were used to repay the money Sidewinder borrowed from Meridian, and that Sidewinder was essentially worthless. Id. ¶ 122. Nevertheless, Pye offered Short $120, 000 for the 12% of Sidewinder Short still owned. Id. ¶ 123. Short believed the Patents were worth millions of dollars more than what Pye had sold them for, but he “believed that he had no recourse against Pye for what, on its face, appeared to be Pye's bad judgment.” Id. ¶¶ 125-26. For this reason, Short agreed to sell his Sidewinder shares on January 10, 2006. Id. ¶ 127. Later in the Spring of 2006, Short saw a press release stating that a large utility had purchased Sidewinder subsidiaries and their intellectual property, which Short took as confirmation of Pye's earlier representations regarding the sale of the Patents. Id. ¶¶ 143-44.

         Short alleges, however, that he later learned of facts indicating that Pye lied to him about selling the Patents. Pye's purpose in lying was to fraudulently convince Short to sell his share of Sidewinder. Short alleges that Pye and Best engineered a web of transactions intended to confuse Short about the ownership of the Patents so that they could exclude Short from the Patents' profit potential. Although it is not completely clear why Pye and Best would have chosen the scheme Short describes, Short alleges that the scheme began with Best resigning as a Sidewinder director and executing a $300, 000 promissory note in Sidewinder's favor on June 30, 2005. Id. ¶¶ 93, 134. Then on July 15, 2005, Best sold his Sidewinder shares to Pye's other company, Meridian, and created a new entity called 4SameDay. Id. ¶ 92, 95. By April 21, 2006, Pye and Best had transferred the Patents from Sidewinder to 4SameDay. Id. ¶ 145. Shortly thereafter, 4SameDay assigned the Patents to another company called Acacia (in which Pye and Best are not alleged to have had any ownership interest), under terms providing that 4SameDay continued to own a 15% share in the licensing profits of the Patents. Id. ¶¶ 145-46, 153. Acacia has successfully pursued settlements regarding use of the Patents with at least 34 large corporations. Id. ¶ 154.

         Short alleges that he only learned about these alleged facts regarding the sale of the Patents to 4SameDay and Acacia when he was contacted by a representative of Acacia in late May or early June 2007. Id. ¶ 149. Short alleges that the Acacia representative told him that Acacia had reviewed the ownership history of the Patents, and based on that review was “concerned that Short's claims against good title in [the Patents] could impact whether Acacia had good title, ” apparently implying that Acacia was concerned with the circumstances under which Short sold his shares of Sidewinder. Id. ¶¶ 149, 156. Short also alleges that he confirmed these facts on a phone call with Best in August 2007. Id. ¶ 160.

         II. The Underlying Litigation

         Even though Short alleges that he learned about the alleged scheme as early as May 2007, Short did not pursue legal action until 2010. In August 2010, Short began communicating with defendant attorney Ted Donner about the Sidewinder matter. Id. ¶ 249. Short retained Donner on October 15, 2010. Id. ¶ 250. On December 30, 2010, Donner filed a complaint on Short's behalf in the Circuit Court of Lake County, making the following claims: (1) fraud against Pye and Best; (2) breach of fiduciary duty against Pye and Best; (3) unjust enrichment against Pye, Best, 4SameDay and one of its successors, two of Sidewinder's successors, and Meridian. Id. ¶¶ 251-52.[3] The complaint was dismissed without prejudice on October 14, 2011. Id. ¶ 254.

         On December 2, 2011, Donner filed a first amended complaint, including all the claims of the original complaint, and adding a claim against Acacia for aiding and abetting a conspiracy to commit fraud. Id. ¶ 256. Donner also filed a second amended complaint on April 9, 2012, which did not add or subtract any claims. Id. ¶¶ 259-60. Donner withdrew from representing Short on June 7, 2011. Id. ¶ 269.

         Short alleges that Donners representation of him was negligent for the following reasons:

• Donner failed to file direct claims against Sidewinder officers and directors, Hughes, and Slater, for their failure to object to Pye and Best's scheme;
• Donner failed to file shareholder derivative claims against Pye, Best, Hughes, and Slater;
• Donner failed to uncover Acacia's participation in the conspiracy to defraud Short, “and only asserted claims of aiding and abetting the conspiracy against Acacia”;
• Donner failed to include material facts in the complaints he filed, “including but not limited to the facts that on January 5, 2006, Pye told Short a confidentiality agreement' prevented further disclosure related to the fabricated December 2005 sale of [Sidewinder] assets”;
• “Donner did not include all of the necessary parties, including but not limited to Circle4, Merex, the Meridian Group, and the Meridian Group Entities”; and
• “Donner incorrectly argued Illinois law applied to Short's breach of fiduciary claims.”

Id. ¶¶ 261-68.

         After Donner withdrew, Short retained Siprut P.C. on June 17, 2012. Id. ¶ 272. On July 13, 2012, the state court granted Short leave to file a third amended complaint, and entered an order acknowledging that Short had voluntarily dismissed without prejudice the claims against Acacia. Id. ¶¶ 286-87. On September 12, 2012, Siprut filed a third amended complaint with Pye and Best as the only defendants, making the following claims: (1) breach of fiduciary duty; (2) fraudulent inducement; (3) fraudulent misrepresentation; (4) conspiracy to commit fraud; and (5) unjust enrichment. Id. ¶¶ 289, 300. On March 8, 2013, the state court dismissed the breach of fiduciary duty, conspiracy to commit fraud, and unjust enrichment claims against Best with prejudice, and the fraudulent inducement and fraudulent misrepresentation claims against Pye without prejudice. Id. ¶¶ 302-03. Siprut withdrew sometime after March 26, 2013. Id. ¶ 307.[4]

         On April 10, 2013, Short retained Brad Grayson of Strauss & Malk LLP (collectively “Strauss”). Id. ¶ 309. On May 1, 2013, Strauss filed a fourth amended complaint making the following claims: (1) rescission of Short's sale of his interest in Sidewinder based on fraud; (2) a shareholder derivative claim for breach of fiduciary duty; and (3) minority shareholder oppression. Id. ¶¶ 312-13. The defendants in the fourth amended complaint were Pye, Best, Meridian, and 4SameDay. Id. ¶ 312. On October 4, 2013, the state court dismissed all of Short's claims with prejudice. Id. ¶ 321.

         Short alleges that Strauss's representation was deficient for the following reasons:

• Strauss failed to file derivative or direct claims against Hughes and Slater;
• Strauss never revived claims against Acacia;
• Strauss failed to revive claims for fraudulent misrepresentation and fraudulent inducement against Pye;
• Strauss failed to advise Short that he had claims against prior attorneys for legal malpractice; and
• Strauss failed to adequately plead Short's claims such that Short had to defend against a motion for sanctions.

Id. ¶¶ 314-20, 358.

         Analysis

         “The basis of a legal malpractice claim is that, absent the former attorney's negligence, the plaintiff would have been compensated for an injury caused by a third party.” Stevens v. McGuireWoods LLP,43 N.E.3d 923, 927 (Ill. 2015). “To prevail on such a claim, a plaintiff must plead and prove that (1) the defendant attorneys owed the plaintiff a duty of due care arising from the attorney-client relationship; (2) the defendants breached that duty; and (3) as a direct and proximate result of that breach, the plaintiff suffered injury.” Id. “To satisfy the element of proximate cause, the plaintiff must plead sufficient facts to establish that ‘but for' the negligence of the attorney, the plaintiff would not have suffered actual damages.” In re Estate of Powell,12 N.E.3d 14, 22 (Ill. 2014). “Because legal malpractice claims must be predicated upon an unfavorable result in the underlying suit, no malpractice exists unless counsel's negligence has resulted in the loss of the underlying action.” Ignarski v. Norbut, 648 N.E.2d 285, 288 (Ill. 1995); see also Nelson v. Quarles and Brady, LLP, 997 N.E.2d 872, 880 (Ill.App.Ct. 1st Dist. 2013) (“A legal malpractice suit is by its nature dependent upon a predicate lawsuit. Thus, a legal malpractice claim presents a ‘case within a case.'” (internal citation omitted)). “Plaintiff is required to establish that but for the negligence of counsel, he would have successfully prosecuted or defended against the claim in the underlying suit.” Ignarski, 648 N.E.2d at 288. “Damages will not be presumed, and the client bears the burden of proving he suffered a loss as a result of the attorney's alleged negligence.” Id. Additionally, “in assessing the damage inflicted by legal malpractice, prime consideration must be given to the situation in which the client was placed at the time of ...


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