Our Illinois legal malpractice attorneys were interested to see a recent decision allowing corporate litigants to assign their claims to former shareholders after a merger. Learning Curve International, Inc. v. Seyfarth Shaw LLP, No. 1-08-0985 (Ill. 1st June 18, 2009). In the underlying case, PlayWood Toys sued Learning Curve International for misappropriation of trade secrets. During that litigation, Learning Curve merged with RC2 Brands. Learning Curve settled that litigation, but then sued its attorneys in the matter and their law firms for legal malpractice. This claim gave rise to the dispute over assignment of claims.
Attorneys Dean A. Dickie and Roger L. Price represented Learning Curve in the PlayWood litigation, which began in 1995. Both attorneys were at the law firm of D’Ancona & Pflaum at the time, but due to personnel moves and mergers, Dickie was at Dykema Gossett and Price was at Seyfarth Shaw during the instant case. In April of 1998, PlayWood offered to settle its trade secrets claim for $350,000; Learning Curve counteroffered $225,000. There was no deal. A jury verdict reached in 2000 held Learning Curve liable for misappropriating the trade secret, but the judge granted a post-trial motion from Learning Curve for judgment notwithstanding the verdict, saying PlayWood had not proven the information at issue was a trade secret. PlayWood appealed to the Seventh Circuit.
While the appeal was pending, Learning Curve merged with RC2. As part of the merger, it agreed to indemnify RC2 from liability related to the PlayWood litigation. Learning Curve remained a separate corporation for tax purposes, but without separate operations. Five months later, the Seventh Circuit ruled, making Learning Curve liable for $6 million in compensatory damages and requiring a new trial on exemplary damages. Rather than face trial, RC2 settled with PlayWood for nearly $12 million, which came from an escrow account set aside for this purpose. RC2 and Learning Curve then agreed in writing to pursue a legal malpractice claim against the attorneys in the original case. This agreement gave former Learning Curve shareholders 90% of any proceeds, but explicitly said nothing in the agreement should be interpreted as an assignment of the claim or its proceeds.
RC2 and Learning Curve then sued Dickie, Price and all of their current and former law firms for malpractice, claiming they negligently failed to advise Learning Curve to settle for $350,000 and negligently failed to explain that they could be liable for millions, including exemplary damages. They sought the cost of the $12 million settlement and all attorney fees paid after the $350,000 settlement offer. The defendants moved for summary judgment on several grounds, saying the claim was not timely; Illinois law does not allow legal malpractice claims to be assigned; and that Learning Curve had not suffered the alleged damages because RC2 paid the settlement. The trial court granted summary judgment on the assignment of claim grounds and ruled that Learning Curve had no right to sue for any costs incurred after the merger. Learning Curve appealed.
The First District started with the issue of the alleged assignment of the claim. Illinois law generally forbids assigning legal malpractice claims, it wrote, and it looks at intent when judging whether a claim has been assigned. That means the disclaimer in the agreement between RC2 and former Learning Curve shareholders was not relevant. However, Illinois and foreign courts have allowed assignment of a malpractice claim in certain circumstances where many interests have passed from one party to another, including, in other states, as part of the transfer of assets in a merger. Because many assets are being transferred in this case, the court wrote, assigning the malpractice claim does not violate public policy. It reversed the trial court’s judgment on that count.
It also rejected the defendants’ argument that the two-year statute of limitations for legal malpractice in Illinois barred plaintiffs’ claim. The defendants argued that the clock started running after the bills came for the original trial in 200, in which Learning Curve was found liable. However, the court wrote, the judge in that trial granted judgment notwithstanding the verdict, leaving Learning Curve liable only for its attorney fees. It was not obvious then that the defendants’ advice was bad. Instead, the First District wrote, the clock started running on this claim after the Seventh Circuit’s verdict. Because this claim was filed within the two-year period from that date, the court wrote, it is not time-barred.
Learning Curve’s luck ran out when the First District considered whether it had any damages from the alleged malpractice. The trial court found that it did not because RC2 paid all post-merger costs, including the judgment from the Seventh Circuit and attorney fees, and reimbursed itself from the escrow account. The appeals court agreed, saying those payments did not affect Learning Curve’s assets. Furthermore, an indemnity clause in the merger agreement eliminated Learning Curve’s losses from those sources. However, the appeals court did say that Learning Curve’s former shareholders, who actually suffered the alleged loss, should substitute as the real parties in interest on the post-merger parts of the claim, writing that “if the defendants committed malpractice, the merger of the corporate client should not cause the claim to vanish.” Thus, the case was reversed and remanded to trial court.