Legal Malpractice Claims Can Be Brought By Shareholders

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You can’t assign a right to sue for legal malpractice once you are no longer a shareholder. 

In a recent Illinois appellate decision, Cafe Holdings, Inc. v. Burke, Warren, McKay, & Serritella, P.C, the court faced a situation where a large holding company’s attorneys and a minority shareholder allegedly colluded against the company’s then-majority shareholder. They allegedly stripped the majority shareholder of all managerial powers and forced the majority shareholder to sell all its shares back to the company at a significant loss.

After the majority shareholder lost its position in the company, it attempted to sue the company’s attorneys for legal malpractice. Illinois’s First District Appellate Court ruled that the former majority shareholder had no right to pursue a legal malpractice claim.

How Can a Shareholder Successfully Bring A Legal Malpractice Claim?

CAFÉ should have sued Dollop Coffee’s attorneys on behalf of its 51% ownership before selling its shares if it wanted compensation for its damages. If CAFÉ had initiated a derivative legal malpractice lawsuit when it still had the right to do so, its claims against Dollop Coffee likely would have proceeded. Although any money awarded would have gone to Dollop Coffee rather than to CAFÉ itself, this influx of funds would have increased the overall value of the company’s shares. Therefore, even if CAFÉ was still forced to sell its shares, Dollop Coffee would have been in a far better financial position at the time of sale.

Selling Your Shares Means Selling Your Rights

Café Holdings, Inc. (“CAFÉ”) invests in specialty coffee markets. In 2018, CAFÉ paid a million dollars for a 51% interest in Dollop Coffee, which was owned and managed by Daniel Weiss.

After CAFÉ became Dollop Coffee’s majority shareholder, it appointed two new managers to run the company’s operations alongside Weiss. Under this new arrangement, a manager could only be removed for “cause.”

In early 2020, CAFÉ and Weiss got into a managerial dispute. In response, Weiss and Dollop Coffee’s attorneys, David Silver and Silver Law Firm, LLC, allegedly executed a new operating agreement without the two CAFÉ managers’ knowledge or consent.

Weiss and the attorneys allegedly used the new agreement to seize CAFÉ’s managerial powers and, unilaterally and without notice, reduce CAFÉ’s company status to merely that of an “economic interest holder.” Then, Weiss sued CAFÉ and Dollop Coffee. Initially, Weiss hired Silver and his firm to represent him in the suit against CAFÉ and Dollop. However, Weiss had to retain new attorneys because Silver had a conflict of interest as Dollop Coffee’s former attorney.

Weiss and CAFÉ eventually settled this lawsuit. As a result of the settlement, Dollop bought out CAFÉ’s 51% ownership shares. However, the buyout was deeply discounted because the internal conflicts had significantly diminished the value of the company’s shares. The language in the settlement indicated that CAFÉ intended to pursue a legal malpractice claim against Silver and his firm to recover damages for the reduction in its shares’ worth. However, when CAFÉ brought its legal malpractice suit, Illinois’s First District Appellate Court determined that CAFÉ had no right to sue the attorneys.

Why Did The Court Dismiss CAFÉ ’s Legal Malpractice Claim?

Silver and his firm argued that CAFÉ never shared an attorney-client relationship with them because Dollop Coffee did not assign CAFÉ the right to pursue a legal malpractice claim against Silver and his firm, and Illinois law would not allow such an assignment even if Dollop had attempted to do so.

The Court agreed with Silver on all the above-listed arguments. Accordingly, this ruling serves as a major lesson for shareholders about the importance of understanding their legal rights and limits when suing corporate attorneys.

Does A Majority Shareholder Have A Right To Sue Its Corporation’s Attorneys For Legal Malpractice?

The first issue in question was whether CAFÉ had a right, as a former shareholder, to sue Silver and his law firm for legal malpractice. As both the Appellate and Circuit Court recognized, “a limited liability company (LLC) is a legal entity separate and distinct from its members.” Therefore, “[t]he attorney for an LLC does not enjoy an attorney-client relationship with the LLC’s members.” Accordingly, a shareholder cannot personally bring a legal malpractice claim against a corporation’s attorney in most circumstances, even if it is the corporation’s majority shareholder. However, any shareholder can bring a derivative legal malpractice claim against a corporation’s attorney.

In a derivative legal malpractice claim, the shareholder sues the corporation’s attorney on behalf of the shareholder’s percentage of ownership in the corporation—not on behalf of the shareholder himself. As such, the corporation, not the shareholder who filed the claim, receives any money awarded. However, a shareholder who brings a derivative legal malpractice claim still benefits from a win because the money awarded to the company usually increases the overall value of the company’s shares. Additionally, the shareholder may be able to obtain its attorneys’ fees spent under the common fund doctrine.

Because CAFÉ sold all its shares before bringing its legal malpractice lawsuit, it (1) could not have brought a derivative legal malpractice claim as a Dollop Coffee shareholder; and (2) would not have benefitted from the company’s share prices increasing, even if Dollop Coffee had assigned CAFÉ the right to bring a derivative legal malpractice claim.

Can A Shareholder Assign a Right To Sue For Legal Malpractice?

Silver Law Firm argued that Dollop Coffee did not assign CAFÉ the right to sue him and his law firm for legal malpractice and that such an assignment would be invalid if it had occurred. The Court agreed with Silver for several reasons.

The New Purchase Agreement included a clause stating, “For the avoidance of doubt, nothing herein shall be construed as assigning to the CAFÉ Parties any right or interest to pursue claims against Company’s Counsel associated with any devaluation of the other 49%[.]” However, a question remained about whether Weiss and Dollop Coffee assigned CAFÉ the right to sue on behalf of the 51% ownership they bought from CAFÉ as a condition of the purchase.

The New Purchase Agreement between Dollop Coffee and CAFÉ did not mention the right to sue counsel as consideration for CAFÉ’s shares; Dollop Coffee would assign CAFÉ the right to pursue a derivative legal malpractice claim on behalf of CAFÉ’s previous 51% ownership. Rather, the only consideration Dollop Coffee offered CAFÉ for its shares was monetary compensation. Furthermore, as discussed above, CAFÉ would not have benefitted from bringing a derivative legal malpractice claim since any money awarded would have been given to a company it no longer owned any shares of. Therefore, CAFÉ repeatedly stated in the New Purchase Agreement that it was “preserving” its right to bring a personal—and not a derivative—legal malpractice claim against Dollop Coffee’s attorneys. But a right that does not exist cannot be assigned or preserved.

As discussed above, a shareholder, in most circumstances, does not have a right to personally bring a legal malpractice lawsuit against its corporation’s attorneys; it only has a right to bring a derivative legal malpractice claim against them. As such, the Appellate Court determined that CAFÉ never had grounds to bring a personal legal malpractice claim against Dollop Coffee’s corporate attorneys and that, even if Dollop Coffee attempted to assign CAFÉ this right as consideration for CAFÉ’s shares, the assignment would have been invalid.

How Can An Attorney Assist With My Corporate Legal Malpractice Claim?

All corporate shareholders should regard this case as a cautionary tale.

When shareholders sell their interest in a company, they are selling their rights associated with that ownership. If you are a shareholder who has been harmed by your corporate attorney, you need to immediately take steps to rectify this harm while you still have the legal right to do so.

If you are a shareholder who has been financially harmed by your corporate attorney’s legal malpractice, we invite you to call us at (312) 779-1818 or to fill out our online contact form for further advice and guidance from a seasoned 1818 legal malpractice attorney.

Jordan Matyas - 1818 Founder

Jordan Matyas

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Jordan Matyas is a lawyer, lobbyist, and Founder of 1818 Legal, an Illinois professional licensing defense law firm he created in 2014. With more than 18 years of experience practicing law, he represents clients in a wide range of legal matters, including professional license defense, administrative law, land use and zoning, and state, local, and municipal law.

Jordan received his Juris Doctor from the University of Illinois — Chicago School of Law and is a member of the Illinois Bar Association.