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Appellate Court Rejects Collateral Estoppel Defense To Legal Malpractice Claim

In the appeal captioned, Stevens v. McGuirewoods, LLP, 2014 IL App (1st) 13-3952, the Illinois Appellate Court reversed a grant of summary judgment in favor of McGuirewoods. The Appellate Court held that the trial court erred in applying collateral estoppel to bar the claims.

In their complaint against McGuireWoods, the plaintiffs alleged that the law firm breached its fiduciary duty to plaintiffs by failing to assert claims against Sidley Austin LLP (Sidley). McGuireWoods moved for summary judgment on the ground that in the underlying case the trial judge ruled that the plaintiffs lacked standing to sue Sidley.

The plaintiffs were former minority shareholders of Beeland Management LLC. They hired McGuireWoods to bring both individual and derivative claims on their behalf and derivative claims on behalf of Beeland against Beeland’s managers and majority shareholder. In the litigation, the plaintiffs eventually sued Sidley for breach of fiduciary duty and other claims. (In a derivative claim, the shareholder stands in the shoes of the corporation and files a lawsuit against someone who has allegedly breached a duty to the corporation.).

Sidley’s motion to dismiss was granted on the ground that the plaintiffs did not file the case within the two year statute of limitations. In the malpractice case, “the plaintiffs further alleged that as a direct and proximate result of McGuireWoods’ failures the value of the underlying lawsuit was ‘materially compromised’ and they were forced to settle the litigation for significantly less money than it was originally worth.” ΒΆ 19. In the underlying case, the court also held that the plaintiffs lacked standing to bring individual claims against Sidley.

McGuireWoods moved to dismiss on the ground that the failure to add Sidley did not cause any harm to plaintiffs because the trial court (in the underlying case) dismissed the claims against Sidley on the basis that the plaintiffs lacked standing to sue Sidley. On the basis of this collateral estoppel argument, the trial court ultimately granted summary judgment in favor of McGuireWoods.

The Appellate Court reversed. To apply collateral estoppel, there must be a final decision on the merits. However “the record establishes that the trial court never dismissed the plaintiffs’ derivative claims against Sidley on the basis of lack of standing. What is more, none of the plaintiffs’ derivative claims against Sidley were dismissed with prejudice on the merits. Rather, they were dismissed with prejudice solely on the basis of timeliness, with with the plaintiffs now fault McGuireWoods. Accordingly, while the trial court correctly concluded that the doctrine of collateral estoppel bars the plaintiffs from relitigating any claims they may have had against Sidley in their individual capacity, that doctrine cannot be used to bar them from litigating the claims they brought derivatively against Sidley on behalf of Beeland.”

Comment: collateral estoppel is a difficult defense to establish in the legal malpractice setting because it has many elements.

Edward X. Clinton, Jr.