7th Circuit affirms summary judgment on ‘merchandized’ malpractice claim

The 7th Circuit Court of Appeals has affirmed judgment in favor of a northern Indiana law firm on a corporate legal malpractice claim, finding the claim was a “bargaining chip” in settlement proceedings.

Before 2017, Duro Inc. had three shareholders. The majority shareholder, Terry Rodino, also served as president of Duro.

Amit Shah and the other minority shareholder often did not agree with Rodino’s management decisions. Those disagreements resulted in numerous lawsuits in state and federal courts spanning over a decade.

In February 2013, Shah and the other minority shareholder filed a lawsuit against Rodino and Duro. The complaint included allegations of money laundering and racketeering in violation of federal and state statutes.

After motions practice aimed at the pleadings, plaintiffs in June 2015 added a shareholder derivative claim of legal malpractice, nominally on behalf of Duro, against the May Oberfell Lorber law firm and attorneys E. Spencer Walton Jr. and Georgianne M. Walker.

Oberfell had represented both Rodino and Duro in the case. Shah and the other minority shareholder moved twice to disqualify Oberfell as counsel.

A magistrate judge denied both motions. Eventually, however, Oberfell withdrew from representing Rodino and Duro.

In September 2017, Shah and the other minority shareholder settled their claims. As part of the settlement, Duro redeemed both Rodino and the other minority shareholder’s shares, making Shah the sole owner of Duro.

The settlement also preserved any claims Duro might have had against Oberfell. In addition, as part of the settlement, Rodino signed a document waiving the attorney-client and work-product privileges regarding all communications, disclosures, advice and documents between him and Oberfell.

Shah then took over effective control of Duro and transferred nearly all Duro’s assets, which were worth millions, to his own pallet company. As a result, Duro no longer has any hard assets, income, employees, revenue or customers.

Shah left one asset, however, in the corporate shell of Duro: the legal malpractice claim against Oberfell.

After these actions, Shah — now acting through Duro — filed a third amended complaint in the Indiana Northern District Court in June 2018.

Duro and Shah asserted individual claims against Oberfell for legal malpractice and what they called “conflict of interest.” In particular, the plaintiffs alleged that, with Oberfell’s consent and assistance, Rodino had breached his fiduciary duties as the sole director and officer of Duro.

Plaintiffs also alleged Oberfell failed to take adequate steps to protect Duro and to prevent Rodino from engaging in unlawful conduct. The district court dismissed Shah’s individual claim for legal malpractice and the “conflict of interest” claim.

Following discovery, Oberfell moved for summary judgment on Duro’s legal malpractice claim. The district court granted the motion, reasoning that the legal malpractice claim had undergone a “de facto” assignment and was therefore barred as a matter of Indiana law.

The district court then entered final judgment in favor of the defendants and Duro appealed.

At the 7th Circuit Court of Appeals, judges weighed whether Duro could bring the legal malpractice claim at all.

Relying on Picadilly, Inc. v. Raikos, 582 N.E.2d 338 (Ind. 1991), judges affirmed summary judgment for the defendants.

“We agree with the district court that permitting the de facto assignment to Shah here would run contrary to Picadilly’s aims and the public policies that are the foundation for the rule,” Judge David Hamilton wrote. “The legal malpractice claim was a bargaining chip in the settlement negotiations between Shah and Rodino. And as part of the bargain, Rodino had to waive all attorney-client and work-product privileges between Duro, himself, and May Oberfell. Duro also had to expressly preserve its legal malpractice claims.

“These actions effectively pitted Duro and Rodino against the lawyers who had represented them, but for the benefit of Shah,” Hamilton continued. “As Picadilly predicted, the parties to this suit were readily willing to ‘merchandize’ the legal malpractice claim and privileges when it was convenient for them to help secure a settlement, thereby weakening the lawyers’ duty of loyalty in the process.

“… The one recognized exception to Picadilly comes from Summit Account & Computer Service, Inc. v. RJH of Florida, Inc., 690 N.E.2d 723 (Ind. App. 1998),” the judge wrote. “In that case, the Indiana Court of Appeals held that Picadilly does not bar assignments to a corporation’s successor in interest. But Summit Account supports May Oberfell in this case, not Shah and Duro. The court relied on several factors to conclude that the assignee was the first corporation’s successor in interest. None of those factors are present here.”

The case is Duro, Inc., et al., v. E. Spencer Walton, Jr., et al., 21-3025.

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