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Mac Naughton v. Harmelech

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

June 5, 2018

W. JAMES MAC NAUGHTON, Plaintiff,
v.
SHAI HARMELECH, ETAN HARMELECH, USA SATELLITE & CABLE, INC., JUDITH HARMELECH, CHICAGO TITLE LAND TRUST COMPANY, JPMORGAN CHASE BANK, N.A., and CITIBANK, N.A., Defendants.

          MEMORANDUM OPINION AND ORDER

          GARY FEINERMAN JUDGE.

         W. James Mac Naughton holds two judgments against Shai Harmelech and his company, USA Satellite & Cable, Inc. In this diversity suit against Shai, Shai's son Etan Harmelech, Shai's wife Judith Harmelech, USA Satellite & Cable, Chicago Title Land Trust Company, JPMorgan Chase, and Citibank, Mac Naughton seeks to collect on the judgments, alleging that the Harmelechs fraudulently concealed Shai's ownership interest in his home by putting the deed in Etan's name and channeling the mortgage payments through Etan. Shai, Etan, and USA Satellite & Cable move to dismiss some claims as a sanction for misconduct by Mac Naughton, and the remaining claims for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Docs. 194, 200. The motions are granted.

         Background

         From May 7, 2009 to July 16, 2009, Mac Naughton defended Shai and USA Satellite & Cable against a lawsuit brought by Russian Media Group (“RMG”). See Russian Media Grp., LLC v. Cable America, Inc., No. 06 C 3578 (N.D. Ill. filed June 30, 2006). That brief professional relationship ended in a dispute over legal bills; Shai and Mac Naughton resolved the dispute by executing a promissory note requiring Shai to pay certain sums to Mac Naughton, but Shai quickly defaulted. See Mac Naughton v. Harmelech, 693 Fed.Appx. 154, 155 (3d Cir. 2017). In October 2009, Mac Naughton filed suit against Shai in federal court in New Jersey, where Mac Naughton lives, for breach of the note. See Mac Naughton v. Harmelech, 2016 WL 3771276, at *2-5 (D.N.J. July 13, 2016).

         The RMG suit ultimately settled, and in May 2011 the court entered a stipulated judgment in favor of RMG against Shai and USA Satellite for $286, 374.76. Doc. 100-6. Shai paid $141, 374.76 towards the judgment before he stopped making payments. Doc. 208 at 8. In August 2014, in return for Mac Naughton's agreement to dismiss a claim he brought against RMG in New Jersey state court, RMG assigned to Casco Bay Holdings, a company controlled by Mac Naughton, the unpaid portion of RMG's judgment against Shai and USA Satellite. Id. at 2-3. (Yes, reader, you read that correctly: Mac Naughton's company purchased from RMG the judgment that RMG had obtained from Mac Naughton's clients in the very case in which Mac Naughton represented those clients.) The assignment provided that Mac Naughton would remit to RMG fifty percent of the first $50, 000 he collected from Shai and USA Satellite and forty percent of any amounts collected in excess of $100, 000, up to $43, 000 in total. Id. at 4.

         After Casco Bay obtained the judgment from RMG, Mac Naughton began to research Shai's assets and found that Shai's son Etan was listed as the buyer on the 2005 purchase deed for Shai's residence in Highland Park, Illinois. Doc. 180 at ¶¶ 18, 22-26. After further research, Mac Naughton found that the house was purchased for approximately $440, 000, and that Etan had been a college student working as an unpaid intern at the time. Ibid.

         On December 14, 2014, Casco Bay and Mac Naughton brought this suit against Shai, Etan, and USA Satellite & Cable, alleging that Shai fraudulently conveyed his Highland Park house to Etan in 2005, when he knew that the RMG lawsuit was imminent, for the purpose of concealing his assets from potential creditors. Doc. 1. The complaint alleged that Casco Bay had standing to pursue the suit as owner of the RMG judgment, id. at ¶ 45, and that Mac Naughton had standing because he was pursuing three separate suits against Shai in state and federal court in New Jersey, including the above-referenced suit for breach of the promissory note, id. at ¶¶ 25-38. Casco Bay and Mac Naughton asked to attach the house in order to satisfy their claims against Shai and USA Satellite & Cable. Ibid. Casco Bay was represented by Mac Naughton-who also represented himself in connection with his personal claims against Shai- and another attorney, Steven Ross. Docs. 3, 5.

         Shai moved to disqualify Mac Naughton (as lawyer) and Casco Bay (as party) from pursuing assets to satisfy the RMG judgment, arguing that Mac Naughton had violated New Jersey Rule of Professional Conduct 1.9(a) when his company Casco Bay obtained the RMG judgment. Doc. 21 at 1. Rule 1.9(a) states: “A lawyer who has represented a client in a matter shall not thereafter represent another client in the same or a substantially related matter in which that client's interests are materially adverse to the interests of the former client unless the former client gives informed consent in writing.”

         Judge Holderman, who presided over this case until his retirement, held an evidentiary hearing on the disqualification motion. Doc. 35. On March 17, 2015, Judge Holderman granted Shai's motion to disqualify Mac Naughton from representing Casco Bay, finding that “Mr. Mac Naughton is engaging in a position materially adverse to the interests of his former clients in a substantially related matter in violation of New Jersey Rule of Professional Conduct 1.9(a), ” ibid., and ordering that “Mr. Mac Naughton will have no further action in [Casco Bay's efforts to pursue the RMG judgment], ” Doc. 100-16 at 15. Judge Holderman declined to disqualify Casco Bay from pursuing the RMG judgment, and Casco Bay remained a plaintiff with Ross as its sole counsel. Id. at 11-12. Judge Holderman told Ross that he could obtain co-counsel, “but not Mr. Mac Naughton.” Id. at 16. Judge Holderman ordered that Casco Bay “proceed without using any information that Mr. Mac Naughton obtained from his prior representation of [Shai and USA Satellite], as well as any information Mr. Mac Naughton may have later obtained as an adversary to his former clients.” Doc. 35. Judge Holderman further stated:

Once a lawyer takes on a representative obligation, that lawyer has a continuing obligation to adhere to the code of professional conduct. Mr. Mac Naughton did not do that here. Mr. Mac Naughton cannot now insulate himself by creating a company [Casco Bay]. The company he created cannot utilize his improprieties to prosecute this action … .

Doc. 100-16 at 15. Shai did not question Mac Naughton's ability to represent himself in his effort to collect on his personal claims against Shai, and Mac Naughton continued making filings on his own behalf in that part of the case. Doc. 49.

         In September 2016, the New Jersey federal court entered a $71, 763 judgment for Mac Naughton in his suit against Shai for breach of the promissory note. Doc. 196-1. Mac Naughton and Casco Bay then filed a first amended complaint in this case, in which Casco Bay sought to collect the RMG judgment and Mac Naughton sought to collect the New Jersey breach-of-contract judgment. Doc. 85. In late November 2017, Shai paid the New Jersey breach-of-contract judgment, plus costs and post-judgment interest. Doc. 196-19. The New Jersey federal court then denied Mac Naughton's motion for attorney fees, reasoning that he had brought the case pro se. Mac Naughton v. Harmelech, 2017 WL 6372233 (D.N.J. Dec. 12, 2017). Mac Naughton's appeal of that ruling is currently before the Third Circuit. See Mac Naughton v. Harmelech, No. 18-1047 (3d Cir.).

         Meanwhile, in September 2017, while motions to dismiss the first amended complaint were pending in this case, Mac Naughton caused the RMG judgment to be assigned from Casco Bay to himself. See Russian Media Grp., No. 06 C 3578, Dkt. 438. Mac Naughton, now representing himself as the sole plaintiff and holder of both the RMG judgment and the New Jersey breach-of-contract judgment, asked this court for leave to file a second amended complaint. Doc. 153. The proposed second amended complaint added as defendants Judith Harmelech and the Chicago Title Land Trust Company in connection with a newly discovered trust agreement, Doc. 153-1 at ¶¶ 64-68, as well as Citibank and JPMorgan Chase, which held the mortgages on the property, id. at ¶¶ 69-74, and asked the court to invalidate both the trust agreement and the mortgages.

         The court granted Mac Naughton's motion to amend without prejudice to Defendants moving to dismiss the second amended complaint. Doc. 179. The court asked the parties to address “whether Mac Naughton's seeking in court to collect the Russian Media Group judgment from his former clients violates the [March 17, 2015] order entered in this case, ” and also “whether, putting aside any rules of professional conduct, the court has the inherent authority to prohibit … Mac Naughton from seeking in ...


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