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Seventh Circuit Applies Judicial Estoppel Doctrine to Legal Malpractice Case

GROCHOCINSKI v. MAYER BROWN ROWE & MAW, LLP, Court of Appeals, 7th Circuit 2013 – Google Scholar.

The Seventh Circuit has affirmed the dismissal of this legal malpractice case filed by a bankruptcy trustee against Mayer Brown Rowe and Maw.  This case has garnered some attention in the legal ethics press. The only problem with this case is that it is unique and it is unlikely to have any precedential value.

The case began with a contract dispute between Spehar Capital and CMGT, Inc., a start-up company with no assets to speak of. Mayer Brown represented CMGT. Mayer Brown’s only important task was to obtain financing for the CMGT.  The financing never materialized.

Spehar Capital entered into a contract with CMGT. Eventually, CMGT pursued another transaction, which also went nowhere, referred to in the opinion as the “Trautner” deal.

Spehar Capital sued CMGT and obtained a default judgment in excess of $17 million. Mayer Brown allegedly told CMGT not to bother defending the lawsuit because CMGT had no assets.

Spehar Capital had a worthless default judgment against CMGT.  Instead of walking away, Spehar Capital forced CMGT into bankruptcy and convinced the appointed Trustee, Mr. Grochochinski, to sue Mayer Brown for legal malpractice for the letting the default judgment get entered.

If the trustee were to win, it would recover a large portion of the default judgment, not from CMGT but from Mayer Brown. The district court and the Seventh Circuit dismissed the legal malpractice claim on the basis of the judicial estoppel doctrine.

Judicial estoppel is a doctrine that can be hard to pin down. The Seventh Circuit used the following language to describe it:

“Judicial estoppel is a flexible equitable doctrine designed to prevent “the perversion of the judicial process.” In re Cassidy, 892 F.2d 637, 641 (7th Cir. 1990). The doctrine protects the courts from being “`manipulated by chameleonic litigants who seek to prevail, twice, on opposite theories.'” Ogden Martin Systems of Indianapolis, Inc. v. Whiting Corp., 179 F.3d 523, 527 (7th Cir. 1999) (quotations omitted); Ladd v. ITT Corp.,148 F.3d 753, 756 (7th Cir. 1998) (“the purpose of the doctrine . . . is to reduce fraud in the legal process by forcing a modicum of consistency on a repeating litigant”). It may be raised by any party, regardless of whether the party was prejudiced by the inconsistency, or by the court on its own motion.

The application of judicial estoppel is “not reducible to any general formulation of principle,” though the inquiry is typically informed by several factors. New Hampshire v. Maine, 532 U.S. 742, 750 (2001) (quotation omitted). The Supreme Court has identified three considerations to help guide the inquiry: (1) whether “a party’s later position must be clearly inconsistent with its earlier position;” (2) whether “the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or second court was misled;” and (3) whether “the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Id. at 750-51 (quotations omitted). We have emphasized that these are not rigid requirements but “general guideposts that must be considered in the context of all the relevant equities in any given case.” In re Knight-Celotex, LLC, 695 F.3d at 722.”

The test for judicial estoppel is mushy and hard to pin down.

The Trustee protested that the actions of Spehar Capital should not be imparted to him. He argued that Spehar Capital and the bankruptcy trustee were two separate parties with different interests.

The Seventh Circuit rejected this argument, finding that the two parties were economically aligned.

So how does estoppel work in this case?

The holding of the opinion is contained in this sentence:

“Once Spehar Capital’s conduct was considered, the district judge concluded that it would be inconsistent for the trustee to prevail in the malpractice case, for the benefit of Spehar Capital, on the theory that Spehar Capital never should have obtained the judgment in the California suit. And without this argument, the court concluded, the malpractice action failed as a matter of law.”

Comment: I am skeptical that this result is the correct one. First, the trustee has the right to bring any case to protect the estate. Second, if this doctrine applies in other cases, innocent creditors could be harmed. Third, perhaps Mayer Brown was negligent in failing to advise CMGT to ignore the Spehar Capital lawsuit. Mayer Brown could have retained bankruptcy lawyers and filed a bankruptcy petition before the Spehar Capital case reached judgment. Fourth, this case seems to allow one court (the Seventh Circuit) to cast doubt on the legitimacy of a state court judgment in another forum. It strikes me as a collateral attack on a judgment, which is not permitted. The federal courts in Illinois are required to give the California judgment full faith and credit. Fifth, I am left with a lingering suspicion that the law firm was let off the hook for an error based upon a technicality.

Edward X. Clinton, Jr.