Developers Surety & Indemnity Co. v. Lipinski

2017 IL App (1st) 152658

No. 1-15-2658

August 22, 2017

SECOND DIVISION

IN THE

APPELLATE COURT OF ILLINOIS

FIRST DISTRICT

DEVELOPERS SURETY AND INDEMNITY ) Appeal from the Circuit Court COMPANY, an Iowa Corporation, By and ) Of Cook County. Through Its Underwriting Manager and ) Authorized Agent, Insco Insurance ) Services, Inc., a California Corporation, ) No. 12 L 3758 ) Plaintiff-Appellant, ) The Honorable ) Raymond W. Mitchell, v. ) Judge Presiding. ) MARC S. LIPINSKI, Individually; ) DONNELLY, LIPINSKI & HARRIS, LLC, ) an Illinois Limited Liability Company; and ) RIORDAN, DONNELLY, LIPINSKI & ) McKEE, LTD., an Illinois Corporation, ) ) Defendants-Appellees. )

JUSTICE NEVILLE delivered the judgment of the court, with opinion.

Presiding Justice Hyman concurred in the judgment.

Justice Mason specially concurred in the judgment, with opinion.

OPINION

¶1 Developers Surety and Indemnity Company (DSI) filed a complaint for legal

malpractice against Marc S. Lipinski. After years of litigation, DSI admitted that insurance

had compensated it for all losses it suffered due to the alleged malpractice. DSI argued that

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under the collateral source rule, Lipinski should not benefit from DSI’s insurance, so the

insurance should not affect the award of damages. DSI admitted that it owed to its insurers

all damages it recovered from Lipinski. The trial court held that the collateral source rule did

not apply in legal malpractice actions. Because DSI could not prove any damages from the

alleged malpractice, the court dismissed the complaint. ¶2 In this appeal, we hold that section 2-403 of the Code of Civil Procedure (Code) (735

ILCS 5/2-403 (West 2012)) required DSI to name its insurers, the real parties in interest, as

plaintiffs. Because the plaintiffs violated section 2-403, we affirm the dismissal of the

complaint. ¶3 BACKGROUND ¶4 The Underlying Litigation ¶5 The University of Chicago hired IRB Construction Partners (IRB) to act as general

contractor to construct a building for the university. IRB subcontracted some of the work to

F.E. Moran, Inc. (Moran), and Moran, in turn, subcontracted some of its work to 3D

Industries, Inc (3D). 3D paid a premium to DSI, and DSI issued performance and payment

bonds, guaranteeing to Moran, as obligee, that 3D, as principal, would complete its work. ¶6 In early May 2005, 3D’s employees walked off the job, leaving 3D’s work incomplete.

DSI assigned Moran’s claim on the bonds to its claims handler, Daniel Berge. DSI retained

the law firm of Riordan, Donnelly, Lipinski & McKee as surety counsel, and Lipinski served

as counsel to DSI for Moran’s claim.

No. 1-15-2568 ¶7 On May 25, 2005, Lipinski sent Berge an email informing Berge that Moran had hired

workers to complete 3D’s work. DSI hired Steve Carlino as an expert to estimate the cost for

completion of 3D’s work. On June 2, 2005, Hal Emalfarb, attorney for Moran, sent a letter to

Lipinski, saying:

“FE Moran’s initial estimate of the cost to complete the 3D Industries, Inc. work

is $792,594.00 (estimate to follow). In addition the unpaid suppliers total

$582,905.85 *** and the union may be owed over $100,000 for total obligations

to complete 3D’s contractual obligations of $1,421,499.85[ ] against a

subcontract balance of $478,496.24[ ] leaving a possible deficit estimated (to be

reviewed) at $943,003.61[ ] of 3D’s outstanding obligations under the bonded

subcontract.

*** [D]emand is again made on the surety to pay the unpaid suppliers ***

and to cash flow the labor to complete the work. ***

*** [T]he surety’s failure to timely respond will be in bad faith as

determining a supplier’s payment bond claim should take less th[a]n an hour

especially since your principal swore under oath [t]he amounts due each

supplier. ***

FE Moran has been forced against its will to take over 3D’s obligations to

perform the bonded subcontract. Is the surety looking for a replacement

contractor? Does the surety agree to fund the bonded incomplete subcontract

work by consenting to placing 3D’s employees and other Union laborers on its

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payroll? The delay in a decision is not without substantial financial harm to FE

Moran.” ¶8 Carlino estimated that Moran would need to spend about $200,000 to complete 3D’s

work. Because Moran had paid 3D $478,496.24 less than the amount it agreed to pay 3D if

3D completed its work, according to Carlino, 3D and DSI owed Moran nothing and Moran

still owed 3D a substantial amount for the work 3D had completed before it stopped working. ¶9 In September 2005, 3D filed a complaint against Moran, charging Moran with breaching

their contract by failing to make payments when due. 3D claimed that Moran’s failure to pay

left 3D with inadequate funds to pay its employees, leading 3D’s employees to walk off the

job. ¶ 10 Moran responded with a letter to DSI setting out its out of pocket expenses due to 3D’s

failure to complete its work and DSI’s failure to meet its obligations under the bonds. Berge

sent Moran a letter formally denying Moran’s claims on the bonds in November 2005. ¶ 11 Moran answered 3D’s complaint and filed a counterclaim against 3D for breach of

contract and fraud. Moran added a third-party claim against DSI for failure to fulfill its duties

as surety and for acting in bad faith when it denied Moran’s claims. Moran’s attorney drafted

a settlement agreement in November 2005. The parties did not reach a settlement at that time.

DSI and Moran engaged in extensive discovery and trial preparation from 2005 through

2009. ¶ 12 In 2010, DSI’s general counsel decided to bring in another law firm to help with

preparing 3D Industries, Inc. v. F.E. Moran, Inc., No. 05-CH-15386 (Cir. Ct. Cook Co.) (3D

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v. Moran), for trial. The new law firm, Tressler LLP, prepared an extended report, dated June

2010, explaining its analysis of the litigation. According to Tressler, 3D had very weak

evidence to support its claim that Moran breached the contract. Moran had strong evidence

that 3D breached the contract, and Moran had strong support for almost all of its settlement

demand for about $5 million. Tressler also found that “there is a risk that Moran may prevail

against [DSI] under the statutory bad faith count. *** [DSI] may have difficulty [proving]

that, to the extent it relied on Carlino’s report, that such reliance was justified or at least not

misplaced.” Tressler recommended an “aggressive settlement strategy,” with “the settlement

range of this matter to be in the area $3,500,000-$4,000,000.” ¶ 13 In August and September 2010, DSI, Moran, and other affected parties settled all the

claims in 3D v. Moran. DSI paid Moran $3.7 million. ¶ 14 Legal Malpractice Litigation ¶ 15 On April 6, 2012, DSI filed a complaint for legal malpractice, naming as defendants (1)

Lipinski, (2) the law firm of Riordan, Donnelly, Lipinski & McKee , and (3) the law firm of

Donnelly, Lipinski & Harris, LLC, for whom Lipinski worked in 2010. DSI alleged that

Lipinski breached his duties as an attorney and that, because of Lipinski’s failures, DSI lost

the opportunity to settle 3D v. Moran in 2005 at a price far less than the $3.7 million DSI

eventually paid. ¶ 16 Lipinski asked in discovery for information concerning DSI’s recovery from reinsurers

for the payments it made in 3D v. Moran. DSI answered, “This interrogatory is not intended

to lead to the discovery of admissible evidence. Pursuant to the collateral source rule,

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contributions by reinsurance or other entities are not discoverable.” The trial court ordered

DSI to answer the interrogatory while expressly leaving unresolved the issue of whether DSI

could recover from Lipinski amounts covered by reinsurance. DSI answered:

“[DSI] paid $4,773,292.23: of this amount, the total loss was $3,985,415.16,

plus expenses of $787,877.07. CHUBB paid $99,160.01 under an E&O policy;

Munich Re paid $2,200,000 under a reinsurance policy; Endurance Re paid

$602,754.04 under a reinsurance policy.” ¶ 17 Thus, DSI admitted that an insurer and two reinsurers had paid a total of $2,901,914.05

of the total settlement plus costs, leaving DSI with unreimbursed damages of $1,871,378.18. ¶ 18 The parties engaged in extensive pretrial discovery, including dozens of depositions and

hundreds of interrogatories. DSI’s experts said that Lipinski breached his duties by relying on

Carlino’s opinion when Carlino had not shown adequate support for that opinion. DSI’s

experts said that Lipinski had a duty to advise DSI to make a substantial settlement offer in

2005. ¶ 19 The trial court assigned a trial date of August 2015. Lipinski filed a timely motion for

summary judgment, arguing that the depositions showed that DSI could not prove that the

parties would have reached a settlement in 2005 but for Lipinski’s alleged errors and

therefore DSI could not prove the proximate cause element of its cause of action. The trial

court denied the motion for summary judgment. ¶ 20 In August 2015, both parties filed numerous motions in limine. Both parties recognized

the significance of the unresolved issue of whether the collateral source rule applied and left

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Lipinski liable for all damages due to the alleged malpractice, even though insurers had

already reimbursed DSI for much of its loss. DSI filed a motion in limine to bar evidence of

its insurance coverage; Lipinski filed a motion in limine to bar DSI from recovering as

damages amounts covered by CHUBB and the two reinsurers. ¶ 21 On September 1, 2015, the trial court held that the collateral source rule did not apply in

legal malpractice actions and therefore Lipinski could present evidence of DSI’s recovery

from CHUBB and the reinsurers and use that recovery to offset any damages awarded to

DSI. DSI filed a motion to reconsider. It attached to the motion its two reinsurance contracts.

The contracts included the following clause:

“[DSI] agrees to enforce its rights of salvage and subrogation by taking

whatever action is necessary to recover its loss from *** any other party who

caused or contributed to its loss or part thereof.” ¶ 22 At oral argument on the motion to reconsider, counsel for DSI informed the court that

“100 percent of the plaintiff’s provable damages are covered by reinsurance.” Counsel

explained that DSI admitted that if it had settled 3D v. Moran, it would have paid to Moran

an amount exceeding the amount left unreimbursed by reinsurers and CHUBB. Counsel said

that if the trial court denied the motion to reconsider the ruling on reinsurance, DSI “would

not be able to prove its damage element.” Lipinski moved to dismiss the complaint with

prejudice. On September 3, 2015, the trial court entered an order dismissing the complaint

with prejudice.

No. 1-15-2568 ¶ 23 In October 2015, DSI filed a motion to amend the complaint. In the proposed amended

complaint, DSI sought to add a count for subrogation, alleging:

“[DSI], pursuant to the terms of the Reinsurance, is obligated to ‘enforce its

rights of salvage and subrogation’ on behalf of Endurance Re and Munich Re.

***

*** [P]ursuant to the law of subrogation in Illinois, [DSI] has the right to

recover on behalf of the Reinsurance the amounts paid in satisfaction of the

underlying claims, and pursuant to the Reinsurance Treaties themselves, [DSI]

has a contractual obligation to seek a recovery from Defendants for amounts

paid by Reinsurance.” ¶ 24 The trial court denied the motion to reconsider and the motion for leave to amend

“because it would be futile.” DSI filed a timely notice of appeal. ¶ 25 ANALYSIS ¶ 26 DSI argues on appeal that the collateral source rule does not apply because the reinsurers

do not count as collateral sources. Lipinski argues that the trial court correctly applied the

legal malpractice exception to the collateral source rule. In the alternative, Lipinski argues

that this court should affirm the trial court’s judgment on grounds advanced in Lipinski’s

unsuccessful motion for summary judgment, that DSI cannot prove the proximate cause

element of its malpractice claim.

No. 1-15-2568 ¶ 27 We agree with Lipinski that this court has authority to “affirm a trial court’s judgment on

any grounds which the record supports even if those grounds were not argued by the parties.”

In re Detention of Stanbridge, 2012 IL 112337, ¶ 74. We find a problem with the complaint. ¶ 28 Section 2-403(c) of the Code (735 ILCS 5/2-403(c) (West 2012)) provides, “Any action

hereafter brought by virtue of the subrogation provision of any contract or by virtue of

subrogation by operation of law shall be brought either in the name or for the use of the

subrogee.” ¶ 29 In Shaw v. Close, 92 Ill. App. 2d 1, 4 (1968), the court explained:

“This statute simply means that the interest of a subrogee cannot be

concealed in any proceeding brought for its benefit. It must be either named as

the plaintiff or disclosed as the real party in interest. Such is the situation in the

case at hand. *** The present action, therefore, had to be brought in the name of

the subrogee itself or in the name of the plaintiff for the use of the subrogee.

Since it was not, it contravened the statute.” ¶ 30 In Gadson v. Among Friends Adult Day Care, Inc., 2015 IL App (1st) 141967, the

appellate court applied Shaw to a case involving an insurer’s subrogation to the rights of its

insured. The Gadson court said, “under section 2-403(c), where the insurer-subrogee is the

only remaining real party-in-interest to the subrogation action because the pecuniary interest

of the insured has been fully satisfied, the insurer-subrogee is required to file the action in its

own name.” Id. ¶ 28 See also Prudential Insurance Co. v. Romanelli, 243 Ill. App. 3d 246,

250 (1993); Nitrin, Inc. v. Bethlehem Steel Corp., 35 Ill. App. 3d 577, 592 (1976).

No. 1-15-2568 ¶ 31 DSI admitted that its reinsurers and CHUBB covered all of the damages it suffered due to

Lipinski’s malpractice. Therefore, section 2-403(c) required the reinsurers and CHUBB to

file the complaint against Lipinski in their own name or by DSI “for the use of” the

reinsurers and CHUBB. Even in the proposed amended complaint, the plaintiffs have failed

to comply with section 2-403(c). Accordingly, we affirm the dismissal of the complaint. ¶ 32 CONCLUSION ¶ 33 The reinsurers and CHUBB did not comply with section 2-403(c) of the Code when they

failed to file a complaint against Lipinski in their own name. Therefore, the trial court did not

err when it dismissed the complaint. ¶ 34 Affirmed. ¶ 35 JUSTICE MASON, specially concurring. ¶ 36 I concur in the majority’s decision to affirm dismissal of DSI’s complaint. I write

specially to address the substantive issue raised by the parties on appeal: whether the

collateral source rule applies in a legal malpractice case when the former client has been fully

compensated through insurance (in this case re-insurance) but the client has an obligation to

repay the collateral source in the event and to the extent of a recovery against the lawyer,

thus potentially precluding a double recovery. The majority finds it is unnecessary to address

this issue given its focus on a procedural issue it finds dispositive, i.e., that the real gravamen

of DSI’s complaint was a subrogation action in which DSI’s reinsurers were the real parties

in interest and who, under section 2-403(c) of the Code of Civil Procedure (735 ILCS 5/2­

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403(c) (West 2012)), were required to be disclosed as such in DSI’s complaint. 1 Although I

agree this is the correct result, I believe it is necessary to address more of the parties’

contentions in order to understand why. ¶ 37 DSI had an attorney-client relationship with defendants and claimed that defendants

committed malpractice when, during a relatively brief window of opportunity in the

underlying case, they failed to settle the claim against DSI for $1.1 million, far less than the

$3.7 million DSI ultimately paid. As damages, DSI sought the difference between the amount

it claimed the underlying case could have been settled for in 2005 and the amount it

eventually settled for in 2010. Although not necessary to resolution of this appeal, suffice to

say that the evidence of defendants’ ability to effect a $1.1 million settlement among all

parties in interest in 2005 was less than compelling. ¶ 38 When defendants sought discovery of amounts paid by DSI’s reinsurers, DSI strenuously

resisted those requests, which were the subject of extensive motion practice. DSI contended

that defendants were not entitled to discover amounts paid by third parties since the collateral

source rule would preclude admission of that evidence at trial. See Muryani v. Turn Verein

Frisch-Auf, 308 Ill. App. 3d 213, 215 (1999) (collateral source rule holds that benefits

received by the injured party from source independent of the tortfeasor will not diminish

otherwise recoverable damages); see also Wills v. Foster, 372 Ill. App. 3d 670, 673 (2007)

1 Since a legal malpractice claim cannot be assigned (Learning Curve International, Inc. v. Seyfarth Shaw LLP, 392 Ill. App. 3d 1068, 1074 (2009)), DSI’s only viable option under section 2-403(c) was to bring the action in its own name “for the use of” its reinsurers.

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(“The rationale for the rule is that the defendant should not be allowed to benefit from the

plaintiff’s foresight in acquiring insurance.”). ¶ 39 Defendants, citing Sterling Radio Stations, Inc. v. Weinstine, 328 Ill. App. 3d 58 (2002),

argued that, as a blanket proposition, the collateral source rule does not apply in legal

malpractice cases. In Sterling Radio, this court found that a legal malpractice plaintiff whose

corporation reimbursed him for a judgment against him in the underlying case could not seek

the judgment amount as damages in a later legal malpractice action. Id. at 65 (“Here, Seith

personally paid nothing in satisfaction of the judgment rendered against him *** as a result

of defendants’ malpractice. Therefore, his measure of damages is zero.”). DSI sought to

distinguish Sterling Radio on the ground that in the context of this case, where the terms of

the reinsurance contracts required DSI to pursue third parties responsible for the loss and, if

successful, reimburse the reinsurers to the extent of any recovery, there was no possibility of

a windfall recovery to DSI and, therefore, the collateral source rule should apply. ¶ 40 DSI eventually disclosed the payments from its reinsurers and was ultimately compelled,

on the eve of trial, to admit that all of the amounts it had paid to settle the underlying case

had been reimbursed pursuant to reinsurance agreements. DSI argued that despite this fact, it

could still recover the difference in settlement amounts as damages given its contractual

obligation to reimburse its reinsurers and so the jury should not hear evidence of the

reinsurers’ payments. The trial court, interpreting Sterling Radio as a categorical limitation

on the applicability of the collateral source rule in legal malpractice cases, acknowledged the

potential merit in DSI’s argument but felt compelled to follow Sterling’s holding. Because

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the remaining amount of DSI’s alleged damages 2 would not warrant the extended jury trial

the parties contemplated, DSI ultimately dismissed its complaint. ¶ 41 On October 5, 2015, three and one-half years after it filed this case, DSI sought leave to

file an amended pleading asserting a subrogation claim, which still failed to name its

reinsurers as the real parties in interest. 735 ILCS 5/2-403(c) (West 2012) (requiring action to

be brought “either in the name or for the use of the subrogee”). The trial court denied leave to

amend as untimely. ¶ 42 Throughout this protracted litigation, DSI has denied that this was a subrogation action

on behalf of its reinsurers. DSI obviously sought to prevent the jury in this case from hearing

any evidence regarding payments received from its reinsurers for the obvious reason that a

jury’s sympathy for a legal malpractice victim would likely be tempered by the knowledge

that the victim’s losses had been covered by a third party, albeit one the victim was obligated

to repay. And while I believe DSI’s effort to distinguish Sterling may well have been

meritorious given the focus of Sterling’s reasoning—the prevention of a windfall recovery by

the malpractice plaintiff—DSI was nonetheless not entitled to mislead the jury by pretending

that it had not been reimbursed for the pecuniary loss it sustained in connection with

settlement of the underlying case. That is what the subrogation provisions of the Code of

Civil Procedure prevent. And it follows that DSI was not entitled to present to the jury a

2 DSI identified its self-insured retention of $500,000 as an element of damage, a position that ignores that DSI would have had to pay that amount if the case settled in 2005 for $1.1 million, as DSI claimed it should have.

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theory of damages that depended on the untrue assumption that it had not been reimbursed

for its losses, which was the only theory of damages DSI advanced. 3 ¶ 43 So the majority correctly concludes that DSI was required under section 2-403 to disclose

the real parties in interest in this case—its reinsurers. And because DSI waited until after

defendants’ motion in limine had been granted and after the case had been dismissed to seek

leave to do what it should have done in the first case—pursue a subrogation action—the trial

court correctly exercised its discretion to deny that long overdue amendment, which, as the

majority points out, still did not cure the failure to name the real parties in interest.

3 DSI was only obligated to reimburse its reinsurers for any recovery it obtained against defendants. To the extent DSI recovered as damages less than what the reinsurers paid, DSI has pointed to no contractual obligation that required it to make up the difference through a lump sum payment. Rather, under the terms of the reinsurance agreements, DSI would have reimbursed the reinsurance pool—either through increased premiums or other means—over time. Thus, any viable damage theory would have had to take into account the time value of money—DSI was reimbursed under its reinsurance contracts long before trial—and would have necessarily addressed the complicated calculation of DSI’s damages based on its future obligation to reimburse the reinsurance pool for any shortfall through increased premiums, retrospective rate calculations, or some other method.