The Passavant Memorial Area Hospital Association v. Lancaster Pollard & Co. et al
Filing
91
OPINION entered by Judge Sue E. Myerscough on 3/15/2013. The Motion to Dismiss, d/e 87 is DENIED. This matter is referred back to Judge Cudmore for further pretrial proceedings. (MAS, ilcd)
E-FILED
Friday, 15 March, 2013 05:02:39 PM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
THE PASSAVANT MEMORIAL
AREA HOSPITAL ASSOCIATION,
Plaintiff,
v.
LANCASTER POLLARD & CO., et al.,
Defendants and
Third-Party Plaintiffs,
v.
JASON L. GEORGE, et al.,
Third-Party Defendants.
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) No. 11-cv-3116
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OPINION
SUE E. MYERSC0UGH, U.S. District Judge:
This matter is before the Court on the Motion to Dismiss the
Crossclaim Against Jason L. George, Esq. and Peck, Shaffer & Williams
LLP Pursuant to Federal Rule of Civil Procedure 12(b)(6) (Motion) (d/e
87). The Motion is DENIED.
I. FACTS
On April 3, 2012, Plaintiff Passavant Memorial Area Hospital
Association filed a Third-Amended Complaint against Defendants
Lancaster Pollard & Co.; Lancaster Pollard Asset Management, LLC.
(these two Defendants will be referred to collectively as “Lancaster
Pollard”); Steven W. Kennedy, Jr.; Jason L. George; Peck, Shaffer &
Williams, LLP (PSW); and Doe Defendants 1-10. The Third-Amended
Complaint contains the following allegations.
A. Allegations Relating to Lancaster Pollard and Kennedy
Passavant is an Illinois not-for-profit corporation that provides
medical services and is located in Jacksonville, Illinois. Lancaster Pollard
specializes in providing financial advice and financial services to health
care, senior living, and affordable housing organizations. Kennedy is a
vice president and investment banker with Lancaster Pollard. PSW is a
law firm at which George was a partner during all relevant times.
In 2006, Passavant was solicited by Kennedy and Lancaster Pollard
to provide bond underwriting and other services relating to Passavant’s
stated intention to issue $32,000,000 in tax exempt bonds. Passavant
engaged Lancaster Pollard for the purposes of entering a bond interest
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rate swap agreement with a third party financial institution. A bond
interest swap agreement would serve as a hedge against fluctuations in
the interest rates of the bonds issued by Passavant.
On behalf of Passavant, Kennedy and other agents of Lancaster
Pollard brokered a bond interest rate swap with Lehman Brothers Special
Financing, Inc. (Lehman). On September 21, 2006, the agreement was
executed in three parts, including the ISDA Master Agreement, Schedule,
and Confirmation.
On September 15, 2008, Lehman filed for bankruptcy. Lehman’s
bankruptcy constituted a default under Paragraph 5(a)(vii) of the ISDA
Master Agreement. Under Paragraph 6(a) of the ISDA Master
Agreement, such default allows Passavant to elect to terminate the
agreement. Kennedy, on behalf of Lancaster Pollard, contacted
Passavant and advised Passavant to withhold the payment due October
1, 2008 and to await further instructions from Lancaster Pollard.
Passavant withheld the payment and awaited further instructions.
On October 1, 2008, Kennedy and Lancaster Pollard provided
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Larry Ragel, Passavant’s Chief Financial Officer, a letter addressed from
Passavant and directed to Lehman. The letter notified Lehman of its
default and stated the reasons Passavant withheld the payments due
under the interest rate swap agreement. The communication to
Passavant included an instruction to sign the prepared letter and send
the letter to Lehman by facsimile (fax).
On October 20, 2008, Lancaster Pollard and Kennedy requested
authorization to act on behalf of Passavant to “unwind” the interest rate
swap agreement with Lehman. Lancaster Pollard and Kennedy were
granted such authorization.
On October 21, 2008, Lancaster Pollard and Kennedy provided a
second letter to Passavant to be addressed to Lehman on Passavant’s
letterhead. This letter was drafted for the purpose of terminating the
bond interest rate swap agreement. Passavant was instructed to send the
communication to Lehman by fax.
On November 18, 2008, Lancaster Pollard and Kennedy provided a
third letter that was also to be sent to Lehman on Passavant’s letterhead.
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The third letter provided that pursuant to the ISDA Master Agreement’s
terms, Lancaster Pollard had used the applicable valuation methods and
determined that the termination value of the interest rate swap
agreement was $0. Pursuant to the instructions of Lancaster Pollard and
Kennedy, Passsavant signed and faxed this letter to Lehman, wired a
payment to Lehman for the amounts that were due and owing prior to
the termination notice, and paid Lancaster Pollard $5,000 for its services
in terminating the agreement.
On March 30, 2009, Lehman contacted Passavant and asserted it
had no record of a notice from Passavant terminating the bond interest
rate swap agreement. Passavant provided fax confirmations showing that
the notices had been transmitted to Lehman. Lehman asserted that
notice by fax was not a proper means of delivery because the ISDA
Master Agreement specified that such notice must be sent by mail and
not by fax. Eventually, Passavant settled the dispute for $2,975,000.
B. Allegations Relating to George and PSW
Passavant alleges that George, a partner in PSW, contacted
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Lancaster Pollard to provide legal advice to is clients, including
Passavant, relating to their rights and obligations under their agreements
with Lehman and the procedures for terminating the agreements after
Lehman filed for bankruptcy. Lancaster Pollard accepted George’s offer.
George developed the procedure by which Lancaster Pollard’s
clients, including Passavant, would terminate their ISDA Master
Agreements with Lehman. The procedure developed by George included
the preparation of the written notices and instructions for their
transmittal to Lehman.
According to the Third Amended Complaint, George knew that the
advice he provided to Lancaster Pollard was intended for the benefit of
Lancaster Pollard’s clients and that Passavant would likely rely upon that
advice in terminating its agreement with Lehman. Lancaster Pollard
transmitted George’s legal advice to Passavant either in its entirety, or
substantially in the same form as it was generated by George. Passavant
terminated the bond interest rate swap agreement in accordance with the
advice. Passavant paid $5,000 to Lancaster Pollard for services related to
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the termination of the agreement, including an invoiced amount for
“legal fees.” PSW invoiced Lancaster Pollard $5,000 in legal fees related
to the advice given to Lancaster Pollard’s clients to terminate the swap
agreement.
Passavant alleges an attorney-client relationship was established
between Passavant and George. According to the Third Amended
Complaint, George breached his duty of care by giving incorrect advice
on the correct manner in which to send the notice of termination to
Lehman. George’s erroneous advice resulted in the damages suffered by
Passavant. Passavant’s claim against PSW is based on a theory of
principal-agency liability because George was a partner, and therefore an
agent, of the law firm.
C. Lancaster Pollard’s and Kennedy’s Crossclaim against George and
PSW
On April 20, 2012, Lancaster Pollard and Kennedy filed their
Answer to the Third-Amended Complaint and Crossclaim against
Defendants George and PSW. Like the Third Amended Complaint, the
Crossclaim alleges that George, provided advice to Lancaster Pollard on
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how to terminate Lancaster Pollard’s clients’ swap agreements with
Lehman. George knew Lancaster Pollard’s clients would likely rely upon
and follow his advice. Lancaster Pollard transmitted the advice provided
by George to Plaintiff, and Plaintiff terminated its swap agreement with
Lehman in accordance with that advice. The legal advice provided by
George was incorrect.
The Crossclaim states that Passavant’s Third Amended Complaint
alleges that Passavant had to pay $2,975,000 to settle with Lehman for
breach of the swap agreement because Passavant followed advice relayed
to it by Lancaster Pollard. Passavant has demanded judgment against
Lancaster Pollard and Kennedy for the amounts it paid to Lehman and
all other damages Passavant incurred as a result of following the incorrect
legal advice provided by George. The Crossclaim alleges that if Lancaster
Pollard and Kennedy have any liability to Passavant arising out of the
attempted termination of Passavant’s swap agreement, such liability is
the direct result of George’s violation of his duties in providing legal
advice with respect to the termination of the swap agreements.
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Therefore, if judgment is entered against Lancaster Pollard and Kennedy,
George and PSW should be ordered to pay Lancaster Pollard and
Kennedy an amount equal to all sums which may be adjudged against
them and in favor of Passavant.
II. LEGAL STANDARD
A motion under Rule 12(b)(6) challenges the sufficiency of the
complaint. Christensen v. Cnty. of Boone, 483 F.3d 454, 458 (7th Cir.
2007). Under the federal notice pleading standards, “a plaintiff's
complaint need only provide a short and plain statement of the claim
showing that the pleader is entitled to relief, sufficient to provide the
defendant with fair notice of the claim and its basis.” Tamayo v.
Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008). When considering a
motion to dismiss under Rule 12(b)(6), the complaint is construed in the
light most favorable to the plaintiff; all well-pleaded factual allegations
are accepted as true; and all reasonable inferences are construed in the
plaintiff's favor. Id. However, a complaint must allege “enough facts to
state a claim to relief that is plausible on its face” to survive a motion to
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dismiss. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547, 127 S.Ct.
1955, 167 L.Ed.2d 929 (2007). For a claim to have facial plausibility, a
plaintiff must plead “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct
alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173
L.Ed.2d 868 (2009). “[T]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, do not suffice.” Id.
Further, the amount of factual allegations required to state a plausible
claim for relief depends on the complexity of the legal theory alleged.
Limestone Dev. Corp. v. Vill. of Lemont, 520 F.3d 797, 803 (7th Cir.
2008).
III. ANALYSIS
On May 2, 2012, George and PSW filed the instant Motion in
which they assert that Lancaster Pollard’s Crossclaim should be dismissed
for the following reasons: (1) Lancaster Pollard engaged in the
unauthorized practice of law by providing legal advice to Passavant and
therefore may not seek indemnification from George and PSW; (2)
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Lancaster Pollard has not stated a viable claim for legal malpractice
against George; and (3) Lancaster Pollard cannot show PSW’s
purportedly erroneous legal advice caused damage to Lancaster Pollard.
A. The Court Will Not Dismiss the CrossClaim Based on the Allegation
Lancaster Pollard Engaged in the Unauthorized Practice of Law
PSW and George first assert that Lancaster Pollard engaged in the
unauthorized practice of law. Specifically, they claim that Lancaster
Pollard engaged in the unauthorized practice of law because Lancaster
Pollard: (1) accepted a $5,000 payment from Passavant for the provision
of legal services, and (2) provided Passavant legal documents when it
provided the documents so that Passavant could terminate the swap
agreement. As a result of this unauthorized practice of law, PSW and
George allege Lancaster Pollard is primarily responsible for any damages
that resulted and indemnification is not available to Lancaster Pollard.
The Court concludes that dismissal of the Crossclaim is
inappropriate because doing so would require the Court to accept PSW’s
and George’s characterization of the facts over Lancaster Pollard’s. PSW
and George maintain that Lancaster Pollard distributed general advice
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from George, an authorized legal professional, to Lancaster Pollard’s
client for a $5,000 fee. The allegations in the Crossclaim, which must be
taken as true, offer a different version of events. The Crossclaim alleges
that George knew that he was retained by Lancaster Pollard to provide
legal advice and that George also knew that Lancaster Pollard’s clients,
including Passavant, would rely on his legal advice. Lancaster Pollard
also allges that George prepared the written notices for terminating the
swap agreements and instructions for their transmittal to Lehman.
Moreover, Passavant has alleged that Lancaster Pollard billed
Passavant $5,000 for services related to the termination of the swap
agreement, including an invoiced amount for legal fees. Passavant has
also alleged that PSW invoiced Lancaster Pollard $5,000 in legal fees
related to advice given to Lancaster Pollard’s clients, including Passavant.
Lancaster Pollard has admitted these allegations. PSW and George have
denied them. The fact Lancaster Pollard may have paid PSW the same
amount for services related to the termination of the swap agreement
could be relevant to rebut PSW’s and George’s argument that Lancaster
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Pollard engaged in the unauthorized practice of law.
Dismissal of the Crossclaim based on the allegation Lancaster
Pollard engaged in the unauthorized practice of law would be premature
given: (1) the parties’ different versions of the facts relating to George’s
legal advice and the transmission of the advice to Passavant; and (2) the
fact that the Court must construe the allegations in the Crossclaim in the
light most favorable to the nonmovant. Lancaster Pollard’s allegations
allow a plausible inference that George, not Lancaster Pollard, was the
party engaged in the practice of law.
B. Lancaster Pollard’s Crossclaim States a Legal Malpractice Claim
In order “[t]o establish a cause of action for legal malpractice, a
claimant must demonstrate the existence of an attorney-client
relationship giving rise to a duty, a breach of that duty, and damages
proximately caused by that breach.”1 New Destiny Treatment Ctr., Inc.
v. Wheeler, 129 Ohio St.3d 39, 2011-Ohio-2266, 950 N.E.2d 157, ¶ 25.
PSW and George claim that Lancaster Pollard has not stated a claim for
1
Both parties have cited Ohio law when addressing whether the Crossclaim
states a claim for legal malpractice.
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legal malpractice in its Crossclaim.
Specifically, PSW and George argue that “Lancaster Pollard’s
allegation that the advice may have been inaccurate does not state a
claim for legal malpractice under Ohio law, because Ohio courts recognize
that ‘[p]rofessional negligence is not established by proving that a
professional opinion turned out to be erroneous.’” PSW and George also
argue that George’s allegedly erroneous legal advice is not the proximate
cause of Passavant’s damages for which Lancaster Pollard would be liable
because termination of the agreements by facsimile was appropriate and
Passavant’s settlement was voluntary.2
As noted above, the Crossclaim alleges that George was an attorney
at PSW and that George offered to provide legal advice for Lancaster
Pollard’s clients, including Passavant, regarding their rights and
obligations under their swap agreements, whether those agreements
should and could be terminated, and the procedures for terminating
them. George developed a procedure and methodology for terminating
2
Lancaster Pollard agrees that Passavant's claims are without merit.
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the agreements and prepared written notices and instructions for the
manner of their transmission to Lehman. George knew this information
would be forwarded to, and relied upon by, Lancaster Pollard’s clients,
including Passavant. Accordingly, the Crossclaim plausibly alleges that
George owed Lancaster Pollard and Passavant a duty of care. This duty
included, but was not limited to, the duty to carefully read Passavant’s
swap agreement before providing advice with respect to the proper
method and means for terminating it. Lancaster Pollard forwarded
George’s advice to Passavant, and Passavant terminated its swap
agreement in accordance with George’s advice.
The Crossclaim further states that Passavant has alleged in its
Complaint that it followed George’s advice which resulted in it having to
pay Lehman $2,975,000 to settle its claims for breach of the swap
agreement. Passavant has demanded judgment against Lancaster Pollard
for the amounts it paid Lehman as a result of following George’s incorrect
legal advice. Finally, if Lancaster Pollard has any liability to Passavant
arising out of the attempted termination of the swap agreements, then
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such liability is the direct result of George’s violation of the standard of
care by, among other things, providing legal advice with respect to the
termination of Passavant’s swap agreement without even reading the
contract.
Lancaster Pollard’s Crossclaim adequately states a claim for legal
malpractice. First, contrary to the claims of PSW and George, the
Crossclaim alleges more than just that George’s advice was incorrect. The
Crossclaim also alleges that George violated his standard of care by giving
incorrect legal advice without reading Passavant’s swap agreement.
George does not contend that a failure to read a contract before advising
on its content is not legal malpractice.
PSW and George also contend that Lancaster Pollard has not
alleged what George should have done differently. George maintains that
he was asked for general advice regarding the termination of swap
agreements which Lancaster Pollard then took and provided to Passavant
as if the general advice pertained to Passavant’s specific agreement.
However, this characterization differs from Lancaster Pollard’s allegation
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that George knew that Lancaster Pollard was going to pass the advice on
to Passavant and that George prepared the termination notices and
instructions for the manner of transmittal to Lehman. Such a dispute
regarding the relevant facts is not appropriately resolved at the motion to
dismiss stage. As stated when considering a motion to dismiss under
Rule 12(b)(6), the facts are construed in the light most favorable to the
plaintiff, all well-pleaded factual allegations are accepted as true, and all
reasonable inferences are construed in the plaintiff's favor. Tamayo, 526
F.3d at 1081.
Finally, George and PSW allege that Lancaster Pollard has not
properly pleaded that George’s advice proximately caused Lancaster
Pollard’s damages because termination of the agreement by facsimile was
proper and Passavant voluntarily settled. Lancaster Pollard agrees with
George’s and PSW’s contentions that the agreement could be terminated
by facsimile and that Passavant voluntarily settled. In fact, those
contentions will be a major part of the dispute between Lancaster Pollard
and Passavant. Lancaster Pollard is simply alleging that George and
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PSW are liable to Lancaster Pollard if Lancaster Pollard is liable to
Passavant. Such a contingent counterclaim is proper under Rule 13(g) of
the Federal Rules of Civil Procedure. See 6 Charles A. Wright, Arthur R.
Miller & Mary Kay Kane, Federal Practice and Procedure,§ 1431, at
281-82 (3d ed. 2010) (Rule 13(g) “does not require that the claim be
mature at the time of pleading;” therefore, “a crossclaim can be
contingent upon the ultimate adjudication of the crossclaimant's liability
to plaintiff”).
IV. CONCLUSION
For these reasons, the Motion to Dismiss (d/e 87) is DENIED.
This matter is referred back to Judge Cudmore for further pretrial
proceedings.
ENTER: March 15, 2013
FOR THE COURT:
s/ Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATES DISTRICT JUDGE
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