This case was decided by the Illinois Supreme Court in October 2014.
Plaintiffs alleged that the defendants committed legal malpractice when they failed to preserve a cause of action under the Illinois Securities Law against an investment firm. Plaintiffs alleged that the lawyers failed to file a rescission claim in a timely fashion causing it to be barred under the statute of limitations. A rescission claim allows the buyer to undo the purchase and obtain a refund of the purchase price. A complicating factor was the settlement of the underlying securities case for $3.2 million.
The main issue in the appeal before the Illinois Supreme Court was section 13(A) of the Illinois Securities Law, 815 ILCS 5/13(A) and how that section impacted the damage claim of the plaintiffs. That section provides:
“§ 13. Private and other civil remedies; securities.
A. Every sale of a security made in violation of the provisions of this Act shall be voidable at the election of the purchaser exercised as provided in subsection B of this Section; and the issuer, controlling person, underwriter, dealer or other person by or on behalf of whom said sale was made, and each underwriter, dealer or salesperson who shall have participated or aided in any way in making the sale, and in case the issuer, controlling person, underwriter or dealer is a corporation or unincorporated association or organization, each of its officers and directors (or persons performing similar functions) who shall have participated or aided in making the sale, shall be jointly and severally liable to the purchaser as follows:
(1) for the full amount paid, together with interest from the date of payment for the securities sold at the rate of the interest or dividend stipulated in the securities sold (or if no rate is stipulated, then at the rate of 10% per annum) less any income or other amounts received by the purchaser on the securities, upon offer to tender to the seller or tender into court of the securities sold or, where the securities were not received, of any contract made in respect of the sale; or
(2) if the purchaser no longer owns the securities, for the amounts set forth in clause (1) of this subsection A less any amounts received by the purchaser for or on account of the disposition of the securities.
If the purchaser shall prevail in any action brought to enforce any of the remedies provided in this subsection, the court shall assess costs together with the reasonable fees and expenses of the purchaser’s attorney against the defendant. Any provision of this subsection A to the contrary notwithstanding, the civil remedies provided in this subsection A shall not be available against any person by reason of the failure to file with the Secretary of State, or on account of the content of, any report of sale provided for in subsection G or P of Section 4, paragraph (2) of subsection D of Sections 5 and 6, or paragraph (2) of subsection F of Section 7 of this Act.” 815 ILCS 5/13(A) (West 2010).
For the defendant lawyers the problem with the statute is the 10% rate of interest, which is much higher than the market rate of interest at the time of the purchase of the securities. The defendants argued that the imposition of the 10% interest was unfair.
The lawyer defendants argued that Section 13(A) did not apply to lawyers in legal malpractice actions. The Supreme Court rejected that argument, explaining, “the damage award in this legal malpractice action compensates the plaintiffs for the actual amount the plaintiffs would have recovered had they been successful in the Illinois Securities Law claim in the underlying Steinberg case Contrary to defendants’ assertion, the Illinois Securities Law is not being applied directly to the defendants. Rather section 13(A) of the Illinois Securities law simply establishes plaintiffs’ actual damages from defendants’ legal malpractice.” Opinion at ¶25.
The Supreme Court also rejected an argument that Section 13 damages were punitive in nature because they were statutory damages. Section 13(A) is a civil remedy designed “to compensate investors for their lost return and to make the investor whole.” Opinion at ¶33. The court also held that the plaintiffs could recover as much interest as they would have been entitled to recover in the Steinberg case. What that meant was that the plaintiffs could recover interest up to the date when they settled the Steinberg case in 2007, but not afterwards. Part of the explanation is included here:
“¶ 53 The appellate court determined that the trial court correctly calculated interest through the 2011 final judgment date in the legal malpractice action. As we have already indicated, calculating interest to the date of the final judgment in the legal malpractice action violates Eastman, 188 Ill. 2d 404. We hold that the interest should have been calculated to the date of the 2007 settlement of the Steinberg action. The measure of damages in the legal malpractice action is the amount the plaintiffs would have recovered in the underlying Steinberg action for their Illinois Securities Law claim. The entire Steinberg action was concluded in 2007. Plaintiffs could not have recovered interest on their Illinois Securities Law claim in the Steinberg action after the 2007 settlement date. By calculating interest to 2011, the lower courts misapplied section 13(A).
¶ 54 Accordingly, on remand, the trial court must recalculate the interest on each of the securities to the date of the 2007 Steinberg settlement. The recalculation of interest should then be added to the full amount paid for all of the securities. Section 13(A)(2) then requires a deduction for any amount received by the purchaser on account of the disposition of the securities when the purchaser no longer owns the securities. Therefore, the trial court must deduct the plaintiffs’ $3.2 million settlement after recalculating the interest.”
In sum, the Illinois Supreme Court rejected defense arguments that applying the statutory damages under Section 13(A) would be punitive or grossly excessive or unfair to attorneys. Simply put the attorneys missed the statute of limitations on the Section 13(A) rescission action and the plaintiffs were entitled to damages that would place them in the same place they would have been in, had the lawyers rescinded the securities purchases. The case holds that the client is entitled to be placed in the same position that he would have been in had the lawyer met the standard of care. Here, the breach of the standard of care led to a large damage award.
Edward X. Clinton, Jr.