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Court Rejects Law Firm’s Argument Legal Malpractice Claim Was Barred By A Release

The case is Construction Systems, Inc. v. FagelHaber, LLC, 2015 IL App (1st) 141700. The plaintiff sued FagelHaber for failing to perfect a mechanic’s lien resulting in the subordination of that lien to a mortgagee’s lien. The legal malpractice claim is straightforward. The more interesting question was whether the law firm could defend on the ground that it settled a fee claim against the client before the legal malpractice claim was filed.

In 2003, Construction Systems retained FagelHaber to serve mechanics lien relating to a real estate development. FagelHaber allegedly failed to perfect the lien because it failed to serve the lien on the Cosmopolitan Bank, which held a mortgage on the property. In January 2004, FagelHaber filed an appearance for Construction Systems in a lawsuit dealing with the mechanics’ liens. (The mechanics’ lien litigation).

In August 2004, FagelHaber withdrew as counsel for Construction Systems in the underlying mechanic’s lien litigation. In November 2004, FagelHaber and Construction Systems entered into a settlement agreement under which Construction Systems … “does hereby fully remise, release and forever discharge FagelHaber..of and from any and all claims, demands, actions, causes of action, suits, … existing at the date hereof or hereafter arising, both known and unknown, forseeable and unforseeable, …arising from or in connection with any matter,… including, without limitation, and Claims in connection with the legal services provided by FagelHaber to [Construction Systems] or the Indebtedness.”

In the mechanics’ lien litigation Construction Systems filed a motion for summary judgment arguing that its lien had priority over the mortgagee, the Cosmopolitan bank. (The bank filed a cross-motion for summary judgment). Construction Systems’ motion for summary judgment was denied and Construction Systems settled the litigation with the bank for a payment of $1,825,000, which was less than its initial claim of $3,146,200.

In 2009, Construction Systems filed a legal malpractice action against FagelHaber alleging that as a result of FagelHaber’s failure to perfect its lien, Construction Systems lien was “subordinate” to the bank’s lien and that it suffered a loss $1,321,200 as a result.

The trial court held that the 2004 release barred the legal malpractice claim, but the Appellate Court reversed. It noted that” under Illinois law, a release will not be construed to defeat a valid claim that was not contemplated by the parties at the time the agreement was executed, and general words of release are inapplicable to claims that were unknown to the releasing party.” Opinion at ¶ 26. The Appellate Court held that “there is no evidence prior to the execution of the release that Construction Systems was advised that it may have a legal malpractice claim against FagelHaber, and the release contains no recitals to that effect.” The Appellate Court held that there was an issue of “material fact regarding whether the legal malpractice claims were within the contemplation of the parties at the time the release was executed.”¶ 34.

The Appellate Court also rejected a judicial estoppel argument advanced by FagelHaber on the ground that Construction Systems did not advance factually inconsistent positions in the mechanics lien litigation.

The final holding was that Construction Systems could recover prejudgment interest in the legal malpractice action because prejudgment interest could have been recovered in the mechanics lien litigation. The recovery of prejudgment interest, in the court’s view was not hypothetical. Therefore, Construction Systems could recover any prejudgment interest it could prove that it lost as a result of FagelHaber’s alleged legal malpractice.

Comment: the case is somewhat surprising in that the court did not simply apply the 2004 release to bar the legal malpractice claim. The ruling makes sense, however, in that Construction Systems did not know that it had a claim until its motion for summary judgment was denied in 2007.

Edward X. Clinton, Jr.