Former shareholders who owned minority positions in a commodity trading firm have no malpractice case against their onetime attorneys, because the case is based on the incongruity of pursuing individual claims on behalf of a corporation, the state’s high court has ruled.
On Thursday, Sept. 24, the Illinois State Supreme Court ended the latest round in a legal battle that dates back to 2005, when several minority shareholders in Beeland Management LLC hired the law firm of McGuireWoods to sue Beeland managers Tom Price and Alan Goodman, and the company’s owner-majority shareholder Jim Rogers in Cook County Circuit Court. The plaintiffs pursued claims individually and derivatively on behalf of the company.
The shareholder plaintiffs were James R. Stevens, Arbor Research Holding Inc., Richard L. Chambers, Clyde C. Harrison, Fred D. Handler, Paul Taylor and the Worth Trust.
The shareholders alleged the managers and owner misappropriated Beeland’s trademarks and other intellectual property at the expense of the company. In 2008, the judge in the case dismissed all claims. The shareholders then dropped McGuireWoods and hired new attorneys, who filed an amended complaint that made the same allegations against the original defendants, but also added complaints against Beeland’s corporate counsel, Sidley Austin LLP.
Sidley Austin filed a motion to dismiss, saying the shareholders’ claims against Sidley Austin were filed after the statute of limitations expired and besides, shareholders lacked standing to sue Sidley, as Sidley’s duty was to the corporation, not the shareholders as individuals. The judge agreed and dropped Sidley from the suit. In July 2011, the rest of the case was settled, with the shareholders giving up their ownership interests in Beeland.
The now ex-shareholders filed a legal malpractice suit three months later against their former counsel, McGuireWoods, contending McGuireWoods failed to lodge claims against Sidley Austin within the statute of limitations. As a result, the ex-shareholders were forced to settle for much less money than the “case was worth,” losing out on at least $10 million.
McGuireWoods countered with a motion that said it didn’t matter whether it was late in lodging the claims, because the judge ruled the shareholders had no standing anyway. McGuireWoods won the motion, prompting plaintiffs to visit the First District Appellate Court. That body ruled the lower court was right to toss the case as far as the plaintiffs’ individual claims went, but pointed out the lower court did not say whether plaintiffs had standing in regard to any derivative claims they had on behalf of Beeland. Rather, the derivative claims were dismissed solely on the grounds they were filed too late, not that plaintiffs were without standing.
The appellate panel remanded the case to circuit court so plaintiffs could proceed with a derivative suit on the ground McGuireWoods did not file plaintiffs’ claims in a timely fashion. However, that was preempted by McGuireWoods going to the Illinois Supreme Court, which agreed to hear the case.
The High Court found little to decide, saying it was clear plaintiffs – in their capacity as individuals – would not have received any money in a successful derivative claim against Sidley, because in a derivative claim the money would have gone to the Beeland corporation, not the plaintiffs as individuals.
“Plaintiffs are attempting to collect for themselves the full amount of a judgment that, in the underlying case, would have been awarded entirely to Beeland,” justices wrote. “It would be impossible for plaintiffs to prove that, in their individual capacities, they would have recovered monetary damages from the timely assertion of their derivative claims against Sidley.”
The State Supreme Court noted that in Illinois, shareholders cannot recover personally on limited liability corporation derivative claims, but that is what the ex-shareholders were arguing would have happened.
The High Court was not impressed with plaintiffs’ argument that if the Court favored McGuireWoods, such a ruling would be tantamount to declaring that attorneys who handle derivative actions for minority shareholders are “immune” to malpractice suits. The Court said that on the contrary, there were other parties who could have sued McGuireWoods, such as Beeland itself and remaining minority shareholders. However, because plaintiffs have divested themselves of interests in Beeland, they cannot sue as “champions” of Beeland.
On this last point, the Court stressed that to pursue a derivative claim, plaintiffs would have had to still be Beeland shareholders, but as former shareholders they are without standing.
The Court affirmed part of the appellate judgment and reversed another part, while affirming the circuit court judgment.
Justice Robert R. Thomas delivered the Court’s judgment, with the concurrence of Chief Justice Rita B. Garman and justices Charles E. Freeman, Thomas L. Kilbride, Lloyd A. Karmeier, Anne M. Burke and Mary Jane Theis.
McGuireWoods is based in Virginia, with offices in Europe and throughout the United States, including Chicago. The firm was represented by Schiff Hardin, of Chicago. Plaintiffs were represented by the Geneva firm of Konicek & Dillon.