United States District Court, N.D. Illinois, Eastern Division
Charles F. Short III, Plaintiff,
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
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,  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). R. 40; R. 42. For the following reasons,
both motions are granted in part and denied in part.
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.
The Underlying Dispute
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.
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.
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. ¶¶
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.
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. ¶¶
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.
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.
The Underlying Litigation
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. The complaint was dismissed without
prejudice on October 14, 2011. Id. ¶ 254.
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.
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
• 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]
• “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.
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.
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.
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.
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 ...