A member of our panel of leading appellate attorneys reviews Thursday's Illinois Supreme Court opinion in the legal malpractice case Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman.

Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman

By Karen Kies DeGrand, Donohue Brown Mathewson & Smyth LLC

In a legal malpractice action for the loss of a claim under the Illinois Security Law of 1953, the Illinois Supreme Court rejected a law firm’s arguments that it was being punished for securities violations rather than subject to compensatory damages for negligence. Stock purchases made in 1987-1990 giving rise to an action against Shearson Lehman, broker Michael Steinberg, and others provided the backdrop for the legal malpractice action. The plaintiffs, Morton and Adrienne Goldfine, retained the defendant law firm, Barack, Ferrazzano, Kirschbaum & Perlman, to sue the brokers after the  investment proved worthless as a result of the bankruptcy of the company whose stock plaintiffs purchased in 11 transactions. The plaintiffs had a claim for rescission under the Illinois Securities Law; however, claims against the broker defendants were dismissed based upon the law firm’s failure to serve the rescission notice required by the statute.

The plaintiffs retained other counsel to appeal the circuit court’s dismissal of the action and sued the Barack firm and several of its partners for the damages they would have recovered had the action been preserved. At the law firm’s request, the trial of the legal malpractice action was stayed while the plaintiffs pursued their claim against Steinberg. In that action, the appellate court affirmed the dismissal of the Securities Law claim, but reinstated common law and statutory fraud claims. The plaintiffs ultimately settled the Steinberg case for $3.2 million and proceeded to a bench trial on the malpractice claim. Calculating the value of the lost statutory action to include the purchase price of the stock, $4.5 million, reduced to reflect the settlement recovered from Steinberg, plus 10% interest and attorneys fees and costs, the trial court entered judgment in the amount of approximately $5.9 million.

Both sides appealed, and the appellate court affirmed the circuit court’s findings on liability. The appellate court determined, however, that the trial court erred in its calculation of damages. In the appellate court’s view, the circuit court should not have deducted the settlement from the amount the plaintiffs paid for the stock before calculating interest and attorneys fees, recoverable damage items under the Illinois Securities Law. The appellate court also held that the plaintiffs were entitled to fees and costs for the appeal.

The supreme court agreed with the premise of the appellate court’s ruling, that the civil remedies provided in the Illinois Securities Law defined the amount that the plaintiffs would have recovered in the underlying case, and thus established the amount of actual damages in the legal malpractice action. Central to the supreme court’s analysis was that the civil remedies provisions contained in the applicable statute, 815 ILCS 5/13(A) (West 2010), are remedial, not punitive. Punitive damages, the court stated, are automatic, predetermined damages; remedial damages are calculated by proof of actual damages. Based on this distinction, the supreme court ruled that 735 ILCS 5/2-1115 (West 2010), which bars the recovery of punitive damages in legal malpractice cases, was not applicable. Similarly, the supreme court distinguished its decision in Tri-G v. Burke, Bosselman & Weaver, 222 Ill. 2d 218 (2006), in which the court had ruled, pursuant to Section 2-1115, that lost punitive damages are not recoverable in a subsequent legal malpractice action. The supreme court also found inapplicable the ruling in Tri-G that precluded an interest award. In Tri-G, the court reasoned, the interest sought was on a hypothetical judgment. By contrast, the interest award sought under the Securities Law pertained to the plaintiffs’ investment in securities.

The supreme court also rejected the defendants’ argument that the amount the plaintiffs recovered from the Steinberg case should be excluded from the interest calculation. The court found that the plaintiffs would have received statutory interest on the entire amount they paid for the securities had the defendants preserved the Illinois Securities Law action. Accordingly, the court found that including the settlement sum in the interest calculation was consistent with the court’s decision in Eastman v. Messner, 188 Ill. 2d 404 (1999), which limits a plaintiff’s recovery in a legal malpractice case to the amount that would have been recovered in the successful pursuit of the underlying case. However, under Eastman, the supreme court cut off the recovery of interest on the date of the Steinberg settlement and rejected the plaintiffs’ argument that the interest should run until the date of judgment, four years later, in the legal malpractice case. The court also rejected the plaintiffs’ contention that only the amount it received from the settlement should be deducted; the court held that the judgment should be reduced by the entire amount of the settlement. The supreme court left the issue of attorneys fees and costs for the trial court to address on remand.