Archive for category: Liability Minute

By Joseph R. Marconi & Brian C. Langs⁽¹⁾
Johnson & Bell, Ltd.
Chicago 

 

Two recent cases out of the First District of the Appellate Court in Illinois have bolstered the right of attorneys to assert the attorney client and work product privileges to withhold documents in the context of a malpractice claim against them. In Garvey v. Seyfarth Shaw LLP, 2012 Ill. App. LEXIS 132; 966 N.E. 2d 523 (1st Dist. Mar. 1, 2012) and MDA City Apartments, LLC v. DLA Piper LLP (US), 2012 Ill. App. LEXIS 201 (1st Dist. Mar. 22, 2012), the Court rejected the application of the “fiduciary-duty” exception to the attorney client and work product privileges. The opinions give instruction as to the underlying facts and factors which will frame and preserve an attorney’s asserted privilege as against his or her former client.

Two recent cases out of the First District of the Appellate Court in Illinois have bolstered the right of attorneys to assert the attorney client and work product privileges to withhold documents in the context of a malpractice claim against them. In Garvey v. Seyfarth Shaw LLP, 2012 Ill. App. LEXIS 132; 966 N.E. 2d 523 (1st Dist. Mar. 1, 2012) and MDA City Apartments, LLC v. DLA Piper LLP (US), 2012 Ill. App. LEXIS 201 (1st Dist. Mar. 22, 2012), the Court rejected the application of the “fiduciary-duty” exception to the attorney client and work product privileges. The opinions give instruction as to the underlying facts and factors which will frame and preserve an attorney’s asserted privilege as against his or her former client.

As developed in the context of trust law, the “fiduciary-duty” exception nullifies the privileged status of legal advice given to a trustee or other fiduciary when the advice sought was motivated by and concerns the interests of the trust itself (and its beneficiaries). In such cases, the “real client” is often a beneficiary who is entitled to have access to that material.2 Courts in other states have expanded the fiduciary-duty exception to other fiduciary relationships besides that of trustees.

Contrarily, the Illinois First District twice, in the space of one month, rejected the application of that exception to claims by clients against their attorneys. In Garvy v. Seyfarth Shaw LLP, supra, a client brought malpractice claims against the attorneys on one matter, but agreed to allow the attorneys to continue to represent them on another matter. In MDA City Apartments, LLC v. DLA Piper, LLP, supra, DLA attorneys first faced a motion to disqualify filed by the opposing party (based on a conflict stemming from work the attorneys had done for members of a business entity that had a common ownership and interests of the opposing party), and later faced malpractice claims from MDA for allegedly not properly disclosing those conflicts in a timely fashion.

In both cases, the plaintiff clients sought communications between the defendant law firms and their in-house and outside counsels that dealt, as it turned out, exclusively with the ancillary malpractice claims being made against them. In both cases, the advice was not related to the representation of the complaining clients nor was it paid for by the clients — but rather the firms themselves. In both cases, the court found that the attorneys had the right to obtain legal advice for themselves in the handling of the actually or potentially adverse actions, and that the attorneys had a reasonable expectation that such advice would be confidential.

The holdings of these cases touched on several aspects of both the attorney client relationship and the nature and extent of privileged communications. With respect to the “fiduciary-duty” exception, the Court rejected the argument that communications discretely related to the claims or potential claims by clients against a firm were part and parcel with communications generated in the course of representing that client. The topic matter, the segregated administration and maintenance of the files, and the source of the payment for the representation were all material factors considered by the Court in its ruling.

The Court further rejected the assertion that the Professional Rules of Conduct which require attorneys to keep their clients reasonably informed or which preclude concurrent conflicts of interest do not impair the attorney’s expectation of confidentiality when consulting other professionals.

Attorneys are advised to ensure the viability of subsequent privilege claims by obtaining the resulting communications at their own expense, without billing the client for any fees or costs involved. The communications and work product sought for their own benefit must be completely segregated from the files generated in the course of representing the client. This is particularly important, and somewhat tricky, when motions to disqualify counsel are raised by the opposition in the underlying claim. When such issues arise, separate, segregated materials ought to be kept out of the underlying file. Attorneys should think long and hard about what information must be, should be, or should not be, imparted to the client — that is, what material was obtained for the client’s benefits and what materials were paid for by the client.

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[1] Mr. Marconi is a shareholder at Johnson & Bell, Ltd., chairman of the business litigation/transaction group, and co-chair of the employment group. He gratefully acknowledges the assistance of Justin H. Volmert in drafting this article.

[2] For a history of the fiduciary-duty exception to attorney-client privilege, including the factors to consider in determining the “real client” able to claim the privilege in jurisdictions where the exception is recognized, see United States v. Jicarilla Apache Nation, 131 S.Ct. 2313 (2011).

By Joseph R. Marconi & Brian C. Langs⁽¹⁾
Johnson & Bell, Ltd.
Chicago 

 

The Rules of Professional Conduct now requires attorneys to provide consent for the banks holding client funds to automatically report overdraws to the ARDC. This is an early detection system for possible financial malfeasance and a call for more discipline in managing and accounting for client funds.

Illinois Rule of Professional Conduct 1.15 requires attorneys to hold client property in an interest-bearing trust account separate from the attorney’s own property. These accounts include Interest on Lawyers Trust Accounts (IOLTAs) and non-IOLTA trust accounts. In an article from last year, In “Eligible” IOLTAs We Trust, we noted some of the September 2011 changes to this rule. One of the more significant changes to Rule 1.15 is the automatic overdraft notification provision, Rule 1.15(h). The rule requires the financial institution at which the trust account is established to promptly notify the ARDC if a trust account is overdrawn, regardless of whether or not the instrument is honored.

To implement the reporting requirement, the rule mandates that all attorneys admitted to practice in Illinois “shall, as a condition thereof, be conclusively deemed to have consented to the reporting and production requirements mandated by this Rule.” Likewise, to be eligible to offer client trust accounts, financial institutions must agree to comply with the reporting requirement.

The Supreme Court’s official comment to Rule 1.15(h) states that the overdraft notification program “is intended to provide early detection of problems in lawyers’ trust accounts, so that errors by lawyers and/or banks may be corrected and serious lawyer transgressions pursued.” The ARDC’s trust account handbook notes that 42 other jurisdictions have a similar rule in place, and, like the Supreme Court’s own commentary, specifies that the system is designed to provide early warning of an attorney’s financial improprieties with respect to client property.

At the same time, however, the ARDC notes that most overdrafts do not result in disciplinary charges, but instead simply identify lawyers who need education about account management. In fact, upon implementing the amended rule, the need for attorney education became immediately apparent.

During the first six months of the rule’s implementation, from September 1, 2011 through February 28, 2012, the ARDC received 283 overdraft notices. During the same time period, it closed 170 of those files because they merely revealed attorney account management errors rather than intentional misconduct. Of the remaining 113 open files, the ARDC is still trying to determine what caused the overdraft, but it expects that the vast majority, again, were not the result of attorney misconduct. None of the overdraft notices to date have resulted in a formal ethics complaint.

The primary cause for inadvertent overdrafts is a draw on uncollected funds. Many lawyers are unaware, for example, that a client check may post to an account before the funds have actually been received by the bank. If the attorney immediately withdraws those funds to pay a filing fee, but the client’s check later bounces, the attorney’s check may result in an overdraft and a corresponding notification to the ARDC. The ARDC cautions that if an attorney has any concerns about incoming funds, the safest way to determine whether an item has cleared is to contact the bank upon which the item is drawn.[2]

The ARDC also notes that inadvertent overdrafts are often caused by untimely check deposits by the attorney’s staff, bank fees that deplete funds, math and transcription errors, attorneys confusing their various accounts or checkbooks, and occasional bank errors.

In sum, although last year’s amendments imposed a stringent monitoring system on trust accounts that automatically notifies the ARDC of even minor oversights, attorneys should not be worried that a single inadvertent overdraft will lead to disciplinary action. It may nevertheless result in an inquiry from the ARDC. To avoid an inadvertent overdraft, attorneys are advised to educate themselves about basic account management, and to pay close attention to their account balances.

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[1] Mr. Marconi is a shareholder at Johnson & Bell, Ltd., chairman of the business litigation/transaction group, and co-chair of the employment group. He gratefully acknowledges the assistance of Justin H. Volmert in drafting this article.

[2] Rule 1.15(j) provides a safe harbor to attorneys in real estate transactions which, if certain requirements are met, permits them to deposit and disburse funds more quickly without fear of violating their duties under this rule.

By Joseph R. Marconi & Brian C. Langs⁽¹⁾
Johnson & Bell, Ltd.
Chicago 

 

Does a statutory limitations period stated in calendar years end on the anniversary date or the day before the anniversary date? Two recent cases, one withdrawn and one with an Illinois Supreme Court Justice’s pointed dissent, indicate that the answer you have been counting on may be subject to challenge.

Lawyers understand that every right, no matter how important, can be summarily extinguished if papers are not timely filed. The statutory timeliness of many key filings (such as a complaint) is set forth in terms of calendar years— i.e., the filing must occur “within one/two/three/ten years” of a “triggering event” (such as an injury or a contract breach). One important statutory deadline is the time within which to file a petition to vacate a judgment. The applicable deadline is found at 735 ILCS 5/2-1401(c) (“Section 1401(c)”), “the petition must be filed not later than two (2) years after the entry of the order or judgment.”

Section 1401(c) identifies a clear triggering event—”entry of the order or judgment”—which is easily and unmistakably determinable. It also provides a clear time period within which to file—two years— a factor which is also easily and unmistakably determinable. The only possible variable is when to start counting down the two years—either on the day of the triggering event, or the day after the triggering event. If one starts counting on the day of the triggering event, then filing on the (second) anniversary date is one day too late, and thus, untimely. However, if one starts counting on the day after the triggering event, then filing on the second anniversary date is timely.

So, the question is, “Do you count the day of the triggering event or not?” Many attorneys act with the understanding that the counting begins on the day after the triggering event per the eponymously titled, “Statute on Statutes”, 5 ILCS 70/1.11:

The time within which any act provided by law is to be done shall be computed by excluding the first day and including the last, unless the last day is Saturday or Sunday or is a holiday as defined or fixed in any statute now or hereafter in force in this State, and then it shall also be excluded…

The answer appears straightforward. Recently, the First and Fifth Districts of the Illinois Appellate Court examined cases with the same timing facts and came to the same conclusion. Yet, an original but withdrawn opinion by the First District and the dissent of an Illinois Supreme Court justice indicate that the answer is not necessarily as straightforward as it might first appear.

In Parker v. Murdock, No. 101645, 2011 Ill. App. Lexis 1101 (1st Dist. 10/18/11), the First District Appellate Court addressed whether a petition to vacate a judgment was filed outside the two-year time frame allowed in section 2-1401(c). On October 13, 2004, plaintiff tenants obtained an ex parte default judgment against defendant landlord Murdock. On October 13, 2006, the two year anniversary of the judgment, Murdock filed a section 2-1401 petition to vacate the default judgment. The circuit court granted Murdock’s petition and vacated the judgment. Parker, 2011 Ill. App. Lexis 1101 at *3-4. Years later, plaintiffs filed a section 2-1401(f) motion[2] alleging that the vacating order was void because Murdock failed to file his petition within two years of the default judgment. Id., at *5. The circuit court denied plaintiffs’ section 2-1401(f) petition and plaintiffs appealed.

Initially, the First District, in a withdrawn decision, reversed. See Parker v. Murdock, 2011 Ill. App. Lexis 993 (1st Dist. 9/13/11). In that withdrawn decision, the appellate court did not mention the computation method stated in 5 ILCS 70/1.11. It instead relied on a vintage 1918 appellate court decision holding that the counting begins on the day of the triggering event. Id., at *11, citing Irving v. Irving, 209 Ill. App. 318, 320 (1st Dist. 1918):

This court has held that ‘in computing time by the calendar year, days are not counted, but the calendar is examined and the day numerically corresponding to that day in the following year is ascertained, and the calendar year expires on that day, less one.’

2011 Ill. App. Lexis 993 at *11

On October 18, 2011, the First District replaced the withdrawn decision, rejecting the rationale of the 1918 decision and adopting the computation method set forth in section 70/1.11. Thus, filing the petition on the two year anniversary date was timely. Parker, 2011 Ill. App. Lexis 1101 at *11-12.

Coincidentally, the Fifth District Appellate Court also confronted the issue of the timeliness of a section 2-1401. Price v. Philip Morris, Inc., No. 0089, 2011 Ill. App. Unpub. Lexis 186 (5th Dist. 2/24/11).[3] In Price, one affirmative defense was based on federal preemption, which the trial court rejected. Defendant filed a direct appeal to the Illinois Supreme Court. On December 15, 2005, the Illinois Supreme Court reversed and remanded with directions to dismiss the case based on the preemption defense. A little over a year later, on December 18, 2006, the trial court dismissed plaintiffs’ case.[4]

On December 15, 2008, the U.S. Supreme Court, in an unrelated case, issued an opinion that rejected essentially the same preemption defense that caused Price to be dismissed. On December 18, 2008, plaintiffs filed a section 2-1401 petition to vacate the trial court’s December 18, 2006 judgment. Defendant Philip Morris opposed the petition as untimely. However, Philip Morris’ argument did not rest on the rationale in Irving; rather, both Philip Morris and the Fifth District focused on identifying the appropriate “triggering event.” Philip Morris argued that it was the Illinois Supreme Court’s December 15, 2005 reversal and remand order, which was issued three years and three days before the filing of plaintiffs’ petition.

The trial court agreed with Philip Morris that the December 15, 2005 remand was the triggering event, not the trial court’s December 18, 2006 entry of judgment. Plaintiffs appealed. The Fifth District Appellate Court, also focusing on the triggering event rather than the manner of computing time, reversed, and held that the section 2-1401 petition was triggered by the trial court’s entry of judgment on remand and was therefore timely filed. Price, 2011 Ill. App. Unpub. Lexis 186 at *18. Because the petition was filed on the two-year anniversary of the trial court’s entry of judgment on remand, the ruling necessarily, though not explicitly, found that the counting of the two years begins on the day after the triggering event, as set forth in section 70/1.11.

With a $10.1 billion Sword of Damocles dangling above its head, Philip Morris sought leave to appeal to the Illinois Supreme Court. On September 30, 2011, over the dissent of Justice Garman, the Illinois Supreme Court denied defendant’s petition for leave to appeal. Thus, the appellate court’s conclusion that plaintiffs’ section 2-1401 petition filed on the anniversary date was timely stands by default. Price v. Philip Morris Inc., No. 112067, 2011 Ill. Lexis 1410 (9/28/11).

Without reference to section 70/1.11, Justice Garman noted in her dissent that section 70/1.10 (Statute on Statutes) defines the word “year” as a “calendar year unless otherwise expressed.” 5 ILCS 70/1.10. 2011 Ill. Lexis 1821 at *5. Justice Garman also noted that old case law, though not directly on point, also interpreted a “year” as expiring the day before the anniversary of the triggering event — contrary to section 70/1.11. 2011 Ill. Lexis 1821 at *5-6. Thus, Justice Garman would have accepted Philip Morris’ appeal to answer the question whether the count of the two years starts on the day of the triggering event or the day after. 2011 Ill. Lexis 1821 at *4-5.

However, the inconsistency between the Irving line of cases (and section 70/1.10) and the result reached in Parker and Price may be rationalized upon a close reading of the earlier case law. Those cases cited by Justice Garman present factual distinctions between limitation periods that are prohibitory and those that are not. In other words, a prohibitory time limit in which proscribed acts are precluded (i.e., a non-compete contract clause limited for a period of calendar years; or, the term of an office holder who cannot be replaced until the completion of his term) will count the day of the triggering event. Thus the prohibition (or the term of office) ends on the day before the anniversary date. Conversely, a time limit which requires that an act be done within the time frame (i.e., section 2-1401(c) or the filing of a complaint) will not count the day of the triggering event, and thus the time for performing the act extends to and including the anniversary date. See Seaman v. Poorman, 272 Ill. App. 264 (3rd Dist. 1933). Whether this distinction will stand upon further review remains to be seen.

By itself, section 2-1401(c) does not identify which day is Day 1 for counting—that of the triggering event or the day after. As it stands now, the First District expressly applies section 1.11 to compute the time for filing a section 2-1401 petition, so that counting begins on the day after the triggering event and expires on the anniversary date. The Fifth District implicitly agrees with the First District. The Illinois Supreme Court also implicitly agrees with the First and Fifth Districts. At least one Illinois Supreme Court Justice is concerned enough with the issue that further review is likely.

The wise practitioner does not take any chances waiting until the anniversary date to file within a statutory deadline– despite section 1.11. The best practice is to file no later than the day before the anniversary date. That is one practice tip you can count on.

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[1] Joe Marconi is a shareholder of Johnson & Bell, Ltd., the chair of the Business Litigation/Transactions group and co-chair of the Employment group. He gratefully acknowledges the assistance of David Macksey, chair of Johnson & Bell, Ltd.’s Appellate Practice group, in drafting this article.

[2] To be clear, the order granting defendant’s section 2-1401(c) motion to vacate the judgment was in turn challenged by plaintiff’s section 2-1401(f) motion (contending the trial court’s order was void). Section 2-1401(f) motions are not subject to a two-year limitation.

[3] Price involved a class action suit against the tobacco companies for health related damages from their products. A bench trial resulted in a $10.1 billion judgment against the tobacco defendants, subject to a ruling on several affirmative defenses.

[4] There was a delay of slightly over a year as the plaintiffs unsuccessfully sought certiorari relief from the U.S. Supreme Court.

By Joseph R. Marconi & Brian C. Langs⁽¹⁾
Johnson & Bell, Ltd.
Chicago 

 

Lawyers are increasingly receiving emails from alleged potential foreign clients looking to collect debts from customers. More likely than not, the email is the first step in a fraudulent scheme which involves a deposit and withdrawal from your special client fund account. A basic knowledge of Article 4 of the UCC and simple precautions can help lawyers avoid becoming a victim of these schemes and protect against other potential fraudulent deposits into lawyer’s special accounts, including fraudulent settlement checks and retainer checks.

The scenario is a familiar one by now for many lawyers. There are variations, but it generally unfolds something like this:

• A lawyer receives an email from a new potential foreign client looking to collect an outstanding debt from a customer in the lawyer’s jurisdiction.
• The lawyer – always anxious for new business – agrees to represent the new client and collect the debt.
• Shortly thereafter, the client informs the lawyer that its customer has agreed to voluntarily pay the outstanding debt and that the customer will shortly be forwarding a check to the lawyer. The client further asks that the lawyer deposit the check into his account and after confirming that the check has cleared wire the funds to the client after deducting the lawyer’s fees.
• Sure enough, a check soon arrives from the customer. The lawyer deposits the check, waits for it to clear, and then wires the money to the client.
• Sounds like a great way to build your practice, right? Think again. Invariably, lawyers who respond to these sorts of email solicitations and engage in the above described scenario are receiving calls from their banks informing them that the checks they deposited in their accounts are counterfeit and demanding immediate reimbursement from the lawyers. And the banks are perfectly within their rights to do so!

The mistake most lawyers make is that they assume that once they hear from their bank that the deposited check has “cleared” and the funds are available there is no risk in wiring those funds. This is simply not true.

The Expedited Funds Availability Act, 12 U.S.C. 4001, et seq., requires banks to disclose when deposited funds will be made available. However, a bank’s making funds available is only provisional until the check is actually paid by the payor bank (i.e., final settlement). UCC § 4-201 provides that prior to final settlement, the depositor’s bank merely acts as the customer’s agent for collection of the check and any advancement of funds by the depositor’s bank is provisional. UCC § 4-214 further provides that if there is no final settlement (i.e., the payor bank does not pay the check), the depositor’s bank may charge back the sum of any provisional advancement of funds or demand a refund from the customer.

As applied to our illustration above, this means that the attorney who deposits the check and wires the funds to his “client” once the check clears may ultimately be liable to the bank for the amount of the fraudulent check. The bank may either charge the lawyer’s account if sufficient funds are available in the lawyer’s account or demand a refund and pursue legal action against the lawyer for the amount of the check.

Lawyers can take some steps to avoid being victims of these fraudulent check schemes. First, be extremely wary of taking on any representation from a foreign client who contacts you only via email. As with any new client, a lawyer should investigate the client thoroughly. This includes determining the actual existence of the client and the validity of its operations. A diligent lawyer should call references for the client, check public records, and obtain supporting documentation of the alleged debt that it owed to the client.

Second, never assume that simply because a check has cleared and funds are available that a check has been paid by a payor bank. Upon receiving a check from a suspicious client, a diligent lawyer should call the payor bank to verify the account and determine if the check is a forgery. A lawyer should also not draw on deposited funds from a suspicious client until he or she receives confirmation from the bank that there has been a “final settlement” and the deposited check has actually been paid by the payor bank.

Finally, lawyers should be cognizant that any check they receive may ultimately be dishonored and they may be liable if they draw upon any provisional funds supplied by the depositor bank. Prudent practice dictates that an attorney ensure that is “final settlement” on retainer checks from clients and settlement checks from opposing parties and attorneys before disbursing funds from those checks.