Learning Curve Internat., Inc. v. Seyfarth Shaw LLP

In Learning Curve Internat., Inc. v. Seyfarth Shaw LLP (2009) 392 Ill. App. 3d 1068 331 Ill. Dec. 843, 911 N.E.2d 1073, the defendant law firm represented a corporation (Learning Curve) in the defense of a complaint for trade secret misappropriation by another corporation (PlayWood). (Id., 911 N.E.2d at p. 1076.) After the law firm allegedly advised Learning Curve to try the case rather than settle it for $350,000, PlayWood obtained a verdict that would cost Learning Curve about $6 million (not including exemplary damages), but the trial court granted judgment notwithstanding the verdict, and PlayWood appealed. (Id. at pp. 1076, 1078.) While the appeal was pending, Learning Curve merged with a third corporation (RC2) in a deal that made Learning Curve a wholly owned subsidiary of RC2. (Id. at pp. 1076-1077.) In the merger agreement, the shareholders of Learning Curve agreed to hold RC2 harmless from any liability arising from the litigation with PlayWood. (Id. at p. 1077.) Following the completion of the merger, an appellate court reinstated the jury verdict, and RC2 agreed to settle with PlayWood for more than $11 million. (Ibid.) Thereafter, the former shareholders of Learning Curve suggested suing the law firm for malpractice. (Ibid.) In anticipation of that suit, Learning Curve, RC2, and Learning Curve's former shareholders modified an escrow agreement that was part of the merger and gave the former shareholders the right to assume control of the malpractice suit if Learning Curve and RC2 were not pursuing it to their satisfaction and also gave the former shareholders the right to 90 percent of the proceeds from the suit. (Id. at pp. 1077-1078.) On summary judgment, the trial court concluded (among other things) that Learning Curve had assigned its malpractice claim to its former shareholders in violation of Illinois law. (Learning Curve Internat., Inc. v. Seyfarth Shaw LLP, supra, 911 N.E.2d at pp. 1078-1079.) The appellate court agreed "that Learning Curve had assigned part of its claim to its former shareholders" (id. at p. 1079), but disagreed that the assignment violated Illinois law (id. at pp. 1081-1082). The appellate court explained that while "Illinois law generally forbids the assignment of claims for legal malpractice," "the rule in Illinois, as in other states, permits the transfer of a cause of action for legal malpractice under certain circumstances. For example, when a client dies after filing a claim for legal malpractice, the claim passes to the client's estate. If a bankruptcy estate owns a bankrupt person's claim for legal malpractice, then that estate has the power to assign that claim to the bankrupt person, giving that person the right to pursue the cause of action. " (Id. at pp. 1079, 1080.) The court then observed that while "courts in other jurisdictions acknowledge the strong policy reasons for disallowing assignment of legal malpractice claims in most cases," "nonetheless, several jurisdictions have carved out exceptions to the general rule prohibiting assignment of malpractice claims." (Id. at p. 1080.) The Court concluded as follows: "Illinois courts have not addressed assignment of a legal malpractice claim as part of a transfer of assets in a merger. Here, as in Richter and Cerberus ... , the assignment formed a minor part of a transaction that encompassed a panoply of other rights and obligations. Learning Curve did not assign the claim to an unrelated third party; instead, Learning Curve assigned part of the claim to the persons who actually suffered the loss due to the alleged malpractice. We find that public policy does not prohibit the assignment of the malpractice claim under these specific circumstances. Hence, the rule barring the assignment of Learning Curve's claim is not applicable; therefore, the defendants were not entitled to judgment as a matter of law." (Learning Curve, at pp. 1080, 1081-1082.)