Grochocinski v. Mayer Brown Rowe & Maw LLP et al

Filing 164

REPLY by Mayer Brown Rowe & Maw LLP, Ronald B Given to MOTION by Defendants Mayer Brown Rowe & Maw LLP, Ronald B Given for summary judgment On Their Unclean Hands Defenses 135 (Attachments: # 1 Exhibit A, # 2 Exhibit B)(Novack, Stephen)

IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION
DAVID GROCHOCINSKI, not individually
but solely in his capacity as the Chapter 7
Trustee for the bankruptcy estate of
CMGT, INC.,
Plaintiff,
v.
MAYER BROWN ROWE & MAW LLP and
RONALD B. GIVEN,
Defendants.

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No. 06 C 5486
Judge Virginia M. Kendall
Magistrate Judge Morton Denlow

DEFENDANTS’ REPLY MEMORANDUM IN SUPPORT OF THEIR MOTION
FOR SUMMARY JUDGMENT BASED ON THEIR UNCLEAN HANDS DEFENSES

Stephen Novack
Mitchell L. Marinello
Steven J. Ciszewski
NOVACK AND MACEY LLP
100 N. Riverside Plaza
Chicago, IL 60606
[phone]
304922

Defendants, by their attorneys, Novack and Macey LLP, submit this Reply
Memorandum, addressing the Response in Opposition to Defendants’ Motion for Summary
Judgment (the “Response” or “Resp. at ___”) filed by the Plaintiff Trustee (the “Trustee”).1
ARGUMENT
The Response devotes the bulk of its 30 pages arguing the merits of this case. But,
Defendants did not move for summary judgment on the merits of the case. Instead, Defendants
moved for summary judgment on their Unclean Hands Defenses, as to which the Response is
almost totally silent. Relying in great part on the Seventh Circuit’s decision in Maxwell, the
Unclean Hands Motion made three central points:
•

First, if this case were to succeed, it would lead to an
absurd result and a fraud on the court. That is because the
very party that wrongfully caused CMGT’s Bankruptcy in
the first place -- and who filed a case that would have to be
found meritless for the Trustee to succeed in this
malpractice case -- would get the lion’s share of any
recovery;

•

Second, the Trustee made absolutely no effort to vacate the
Default Judgment that is the basis for his alleged damages
-- a motion practically invited by the California judge who
entered the Default Judgment in the first place; and

•

Third, as demonstrated by his own sworn testimony, the
Trustee has no knowledge of even the most fundamental
allegations of his contrived complaint and made absolutely
no attempt to understand or investigate the facts before he
filed this lawsuit.

In his Response, the Trustee basically ignored these three points, and submitted no affidavits or
deposition testimony to contradict the facts that underlie them. Any one or more of these three

1

Capitalized terms used in this Reply shall have the same meaning as in Defendants’
opening memorandum (the “Opening Brief” or “Op. Br. at _____”).

points requires the entry of summary judgment for Defendants on the basis of the Unclean Hands
Defenses, and the Court need go no further than these three arguments to resolve the Motion.
Having no answer to those three points, the Trustee attempted to change the subject and
lure Defendants and the Court into a hypothetical discussion of the purported merits of this case.
Yet, these “merits” arguments have nothing to do with the Maxwell standard or the arguments
upon which this Unclean Hands Motion is based, and the Court need not -- and should not -address them. Nevertheless, to the extent the Court considers the Trustee’s “merits” arguments,
they will give the Court no pause in granting the Unclean Hands Motion. If anything, they
further confirm the inadequacy of the Trustee’s pre-litigation investigation and further establish
that the Trustee did not exercise reasonable litigation judgment under Maxwell. Indeed, in
support of his “merits” arguments, the Trustee still did not offer any real evidence. Instead, he
made arguments based on unreasonable inferences from various snippets of documents (many of
which are unauthenticated and/or contain inadmissible hearsay). The Trustee submitted no
affidavits and no deposition testimony to demonstrate that his case has any merit.2
This Reply will proceed as follows. Defendants will first address (in Sections I, II and
III) the three arguments on which the Unclean Hands Motion is based. That will conclusively
show that the Motion should be granted, and the Court need not read further. For completeness,
however, Section IV will then show that the Trustee’s “merits” arguments not only do not defeat
the Unclean Hands Motion, but, ironically, further support and confirm why it should be granted.

2

The Trustee submitted only two affidavits: (a) one from his counsel purporting to
identify the source of certain documents, but not authenticating them; and (b) one from Gerald
Spehar (“Gerry”) that does nothing more than deny that Franco offered $250,000 to settle the
claims of Spehar Capital (“Spehar”). (Resp. Exs. 1 & 33.) Moreover, the Trustee failed to cite
his own deposition entirely, cited Gerry’s deposition only once and cited Franco’s Affidavit on
four occasions. (See Plaintiff’s Local Rule 56.1(b)(3)(C) Statement in Support of His Response
to Defendants’ Motion for Summary Judgment at ¶¶4, 6, 7, 27 & 43.)
2

I.

IF SUCCESSFUL, THIS CASE WOULD YIELD
AN ABSURD RESULT AND FRAUD ON THE COURT
Defendants’ Opening Brief (at 8-11) showed that, if successful, this case would yield an

absurd result or fraud on the Court. To prove malpractice, the Trustee would have to show that
Spehar had no legitimate claim and that it would have lost the Spehar Lawsuit “but for”
Defendants’ alleged malpractice. Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389,
395 (Ill. 2006) (a malpractice plaintiff “is required to prove that but for the attorney’s negligence,
the plaintiff would have been successful in [the] underlying action”); Merritt v. Goldenberg, 841
N.E.2d 1003, 1010 (Ill. App. Ct. 2005) (“plaintiff must establish that ‘but for’ the attorney’s
negligence, the client would not have suffered the damages alleged”). Yet, if the Trustee were
able to do so, the lion’s share of the recovery would go to Spehar, who would have just been
shown not to have a legitimate claim. The result would be that the very entity who was not
entitled to recovery and wrongfully caused CMGT’s Bankruptcy would get the recovery.
In great part, Defendants’ argument is based on Maxwell, in which the Seventh Circuit
instructed judges to “be vigilant in policing the litigation judgment exercised by trustees in
bankruptcy,” because, among other things, a trustee is not constrained by the same risks or costs
facing typical litigants. 520 F.3d at 718. For example, unlike a corporate litigant, a trustee has
no concern about future relations with suppliers, customers or creditors. Id. Also, a trustee does
not have to pay to pursue litigation -- the estate does. Thus, a trustee may choose to pursue
unworthy litigation with nothing to lose by doing so. Yet, even a frivolous case costs money to
defend, so the trustee may be able to score a quick “cost of defense” settlement -- and earn a fee
to boot. The Seventh Circuit recognized that only the judges before whom such cases are filed
can keep a trustee from pursuing such cynical litigation. Id.

3

In Maxwell, a trustee filed a malpractice action arising out of a KPMG audit.

If

successful, the principal beneficiary of the lawsuit would have been the former shareholders of
“U.S. Web.” However, it was U.S. Web that caused the debtor to fail in the first place because it
failed, and dragged the debtor down with it. The Seventh Circuit held that such a result could
not stand because “U.S. Web cannot be at once the cause of the bankruptcy and its principal
beneficiary.” Id. at 716. Substitute Spehar for U.S. Web and that is our case here. Indeed, our
case makes the point even stronger, because Spehar intentionally caused CMGT’s Bankruptcy.
The Response (at 18) tries to brush Maxwell aside, arguing that this part of the decision
was obiter dictum, and may not have been fully considered. However, the Seventh Circuit itself
raised this issue and criticized the litigants for not raising it themselves. Maxwell, 520 F.3d at
715. It also instructed judges to “be vigilant in policing the litigation judgment exercised by
trustees in bankruptcy.” Id. at 718. The Seventh Circuit would not raise an issue, criticize the
parties for not raising it, and instruct judges to consider that issue in future litigation without
fully considering it. And, even if the Seventh Circuit did not fully consider the issue, would the
Trustee really have this Court ignore the express instruction of the Seventh Circuit?
The Response (at 18) next argues that Maxwell does not apply because there is a question
of fact about whether the proximate cause of CMGT’s insolvency was Spehar or Defendants.
Yet, in Maxwell, the trustee’s claim was that U.S. Web pulled the debtor into bankruptcy and
KPMG was negligent in failing to prevent this. Id. at 715. That is the same claim the Trustee
makes here -- i.e., that Spehar pulled CMGT into bankruptcy and Defendants were negligent in
failing to stop Spehar from doing so.

In both cases, the debtor would not have been in

bankruptcy but for the acts of U.S. Web and Spehar, respectively.

4

Finally, based on two invalid arguments, the Response says there will be no absurd result
here. First, the Response (at 19) claims that the Trustee does not have to prove that the Spehar
Lawsuit was “meritless,” but only that it was a “colorable” claim that should not have been
ignored, or that “technical defenses” should have been raised to defeat it. Yet, that is all a matter
of semantics. The relevant point is that, to succeed, the Trustee has to show that Spehar would
not have gotten the Default Judgment but for Defendants’ negligence. Tri-G, 856 N.E.2d at 395;
Merritt, 841 N.E.2d at 1010. It does not matter if that is because Spehar’s claim was “meritless,”
“colorable,” or subject to “technical defenses.” They all lead to the same result -- that Spehar
should not have gotten the Default Judgment. But, if the Trustee were to prove this and recover,
he would then have to turn around and hand the lion’s share of the recovery to Spehar as a
reward. So, in the end, the very party who should have gotten nothing gets almost everything.
Second, the Response (at 20) argues that there is nothing wrong with that result. In
support, the Response relies solely on Brandon Apparel Group v. Kirkland and Ellis, 887 N.E.2d
748 (Ill. App. Ct. 2008). Yet, that case was not a federal or bankruptcy case, and it is irrelevant
to this issue. Brandon Apparel simply applied principles of state law (the non-assignability of
legal malpractice claims) not relevant to the Seventh Circuit’s policy directive in Maxwell. In
fact, Maxwell had been decided only a few weeks before Brandon Apparel was decided, and the
Brandon Apparel court may not have been aware of it. And, even if it were, unlike this Court,
the Illinois Appellate Court is not bound by the Seventh Circuit’s ruling.
*

*

*

The bottom line on Defendants’ absurd result/fraud on the court argument is this: Spehar
filed its suit, obtained the Default Judgment and put CMGT into bankruptcy. In order for the
Trustee to prevail on his malpractice claim, he must prove that Spehar would have lost if a
5

defense had been made. But, then, the entity that would get almost all of the recovery would be
Spehar.

The Court must ask itself:

Would it allow such a result?

Would it do so

notwithstanding Maxwell? If the answers are “No” -- and they surely must be -- then the Court
must grant Defendants’ Unclean Hands Motion. Although this is enough in itself, there are still
other separate grounds to which this Reply now turns.
II.

THE TRUSTEE DID NOT EXERCISE
REASONABLE LITIGATION JUDGMENT IN
REFUSING TO MOVE TO VACATE THE DEFAULT JUDGMENT
Maxwell instructs District Courts to “be vigilant in policing the litigation judgment

exercised by trustees in bankruptcy.” 520 F.3d at 718. Here, the Trustee’s malpractice case
could not have been filed if the Default Judgment did not exist. So, the question that arises under
Maxwell is: Did the Trustee exercise reasonable litigation judgment in choosing to make no
effort to vacate the Default Judgment, and, instead, pursue this malpractice action? As will now
be shown, the answer is a resounding no.
The Trustee admits that vacating the Default Judgment would have eliminated any
possible damage to CMGT and been in CMGT’s best interests. (See Resp. to Defs.’ Local R.
56.1 Statement of Facts at ¶¶59-60, cited herein as “56.1 Resp. at ¶__.”) It is also undisputed
that the California judge as much as invited such a motion. (56.1 Resp. at ¶49.) Yet, as set forth
in the Opening Brief (at 11-14), the Trustee made no effort to vacate the Default Judgment. He
did no case law research, never consulted a California lawyer and his time sheets show that no
real time was spent on this issue. The Response does not dispute this or present any evidence
that the Trustee did try to vacate the Default Judgment. In fact, as to the Default Judgment, the
Trustee did not exercise reasonable litigation judgment from beginning to end.

6

A.

No Effort To Determine Why The Default Judgment Was Entered

The Trustee’s first step should have been to find out why the Default Judgment was
entered in the first place. This information would have allowed the Trustee to make a reasonable
and educated choice about whether he had a viable motion to vacate. Indeed, this information
might have shown the Trustee that the lawyers did nothing wrong and that there was, therefore,
no viable motion to vacate and no malpractice suit to file.
A reasonable trustee would have immediately contacted CMGT’s former management to
ask why CMGT did not appear in the Spehar Lawsuit. We now know, of course, that -- if only
the Trustee had asked -- CMGT’s key management and shareholders would have told him that
CMGT made its own conscious business decision, for a variety of financial and/or other reasons,
to go out of business, not to defend the Spehar Lawsuit and to allow an uncollectible and
meaningless default judgment to be entered against it. (See Franco Aff., Appendix Ex. B, ¶¶42,
44; Baliga Aff., Appendix Ex. C, ¶¶8-9; Quarles Aff., Appendix Ex. D., ¶4; Wong Aff.,
Appendix Ex. E, ¶¶7, 9-10.)3 Although that fact kills any possible malpractice case against
Defendants, the Trustee simply closed his eyes and did not interview these key witnesses.
Actually, it is worse than that. The truth is that -- even without talking to CMGT’s
management -- the Trustee knew that the Default Judgment resulted from CMGT’s lack of
money to defend itself in the Spehar Lawsuit. As established in the Opening Brief (at 13, 19-21),
the Trustee’s own Bankruptcy Affidavit admitted as much, as did his draft letter to Spehar’s
counsel. (56.1 Resp. at ¶¶67, 137.) But, ignoring that, the Trustee still filed this case.
Yet, even if one were to give the Trustee the undeserved benefit of the doubt -- and
assume that he truly believed that the Default Judgment resulted from Defendants’ negligence -3

References to “Appendix” herein are made to Defendants’ Appendix of Exhibits in
Support of Their Motion for Summary Judgment Based on Their Unclean Hands Defenses.
7

that still would not excuse the Trustee’s failure to move to vacate the Default Judgment.
Although the Trustee has floated two excuses for not doing so, each fails, as will now be shown.
B.

Excuse One -- Defendants Would Not
Help The Trustee By Filing An Affidavit

The Trustee’s first excuse is his argument that: (1) under California law a motion to
vacate based on attorney error requires the attorney’s affidavit of error; and (2) Defendants
would not have given one. (Resp. at 29-30.) Both fail, as shown below.
1.

California Law Regarding Attorney Affidavits

A motion to vacate based on attorney error that is supported by an attorney affidavit
confessing error must be granted. Cal. Code Civ. Pro. §473. In cases where the attorney error
alleged by the party involves a difficult or unsettled question of law, such a motion may be
granted as a matter of discretion even absent an attorney affidavit confessing error. E.g., State
Farm Fire & Casualty Co. v. Pietak, 109 Cal. Rptr. 2d 256, 263-64 (Cal. Ct. App. 2001).
2.

The Trustee’s Conduct
a.

The Trustee Did Not Ask Defendants For An Affidavit

Faced with this California law -- and assuming arguendo that he really believed that
Defendants had committed malpractice -- the Trustee should have confronted Defendants with
his “evidence,” explained his case and asked Defendants to sign an affidavit confessing error so
that he could eliminate the Default Judgment -- which he admits would have been in the estate’s
interests. (56.1 Resp. at ¶60.) Had the Trustee done so, he may have learned there was no
attorney negligence. Alternatively, if the Trustee were even arguably correct, Defendants may
well have signed an affidavit. After all, that would have been in Defendants’ best interest too
since it would have guaranteed vacating the Default Judgment, thus eliminating any possible
malpractice suit.
8

The Response (at 30) argues that Defendants would not have signed such an affidavit. In
support, the Response cites to Defendants’ denial of the Trustee’s request to admit asking
Defendants to admit both: (i) that they committed negligence (a doctrine that encompasses more
than a mere mistake); and (ii) that such negligence caused the entry of the Default Judgment.
The denial of that compound and overbroad request says nothing about whether Defendants
would have simply admitted to a mistake if the Trustee had come forward with legitimate
evidence of a mistake and asked Defendants to sign an affidavit. (See Resp. Ex. 106.)
b.

The Trustee Could And Should Have Sought To Vacate
The Default Judgment Even Without Defendants’ Affidavit

Even without Defendants’ affidavit, reasonable litigation judgment still required that the
Trustee file a motion to vacate. The Trustee says that Defendants negligently advised CMGT not
to appear because California had no personal jurisdiction. If the Trustee truly believed that, he
surely could have shown that the issue -- i.e., whether California has jurisdiction over a Delaware
corporation with an Illinois principal place of business, but who contracted with a California
company and had several contacts with it -- was a difficult question of law. Indeed, as the
California Appellate Court has explained it, “[t]he principles governing jurisdiction are simple to
state but difficult to apply.” Virtualmagic Asia, Inc. v. Fil-Cartoons, Inc., 121 Cal. Rptr. 2d 1, 7
(Cal. Ct. App. 2002) (internal quotation marks omitted); compare id. at 11-12 (finding personal
jurisdiction over foreign corporation based on contract with California corporation) with
Goehring v. Superior Court, 73 Cal. Rptr. 2d 105, 112-15 (Cal. Ct. App. 1998) (finding no
personal jurisdiction over general partners of partnership based on contract with California
corporation). If so, the California judge would have had the discretion to vacate the Default
Judgment even without an affidavit from Defendants. State Farm, 109 Cal. Rptr. 2d at 262-64.
And, since that very judge had already noted that the amount of the Default Judgment was based
9

on speculative testimony and invited a motion to vacate (Appendix Ex. F at 5, 7), there is every
reason to believe that he would have granted the motion. Thus, no matter what, the Trustee’s
only reasonable response was to file a motion to vacate the Default Judgment.

Yet, the

undisputed fact is that he never even looked into the possibility of doing so.
C.

Excuse Two -- The Estate Had No Money To File A Motion To Vacate

The Trustee has argued that the estate had no money to fund a motion to vacate. As
shown in the Opening Brief (at 13, 19-21), this brings us back to the undeniable fact -- discussed
in Section II.A above -- that CMGT did not have the money to defend the Spehar Lawsuit and,
thus, there could not possibly be any malpractice suit against Defendants. But, even giving the
Trustee the undeserved benefit of the doubt once again, he could have easily prepared a motion
to vacate the Default Judgment himself, mailed it to the California Court with a simple motion
for leave to appear pro hac vice, and asked permission to argue both motions telephonically.
Surely, the California state court judge would have accommodated a federal bankruptcy trustee -particularly since that judge already as much as invited a motion to vacate. (56.1 Resp. at ¶49.)
D.

The Trustee Did Not Exercise Reasonable Litigation Judgment

In the end, there is no reasonable explanation for why the Trustee did not even try to
vacate the Default Judgment. The worst case scenario is that he would have lost the motion to
vacate. But, if that had happened, he could still have filed his malpractice action.
Which leads to the next question: Why did the Trustee jump into this malpractice action
without first trying to vacate the Default Judgment? The obvious answer is that, as Maxwell
pointed out, there was no risk (or cost) to him in filing this case. So, at no risk or cost to himself,
the Trustee put himself in a position to collect a fee if he could extract a settlement out of what
he perceived to be Mayer Brown’s “deep pockets.” Conversely, vacating the Default Judgment
would have nullified any potential malpractice claim and left the Trustee with a no asset
10

bankruptcy estate (56.1 Resp. at ¶138), and no ability to collect a meaningful fee. Ironically, the
Trustee has attempted to project his own self-dealing and conflicted decision-making on
Defendants. He has fooled no one.
Under Maxwell, this Court is required to scrutinize what the Trustee did here, and to
determine if his litigation judgment was reasonable. The Trustee’s unreasonable handling of the
Default Judgment is one more dispositive reason why this is the exact type of case that Maxwell
warned against. For this second and independent reason, the Unclean Hands Motion should be
granted and this spectacle should come to an end. Once again, the Court may stop here.
Nevertheless, we discuss still further independent grounds.
III.

THE TRUSTEE DID NO PRE-FILING INVESTIGATION
The Opening Brief demonstrated that the Trustee’s case was, as this Court itself noted,

“very odd” -- and begged for a thorough pre-filing investigation. And, Maxwell requires district
courts to act as gatekeepers and to prevent bankruptcy trustees from pursuing cases that do not
have a reasonable basis. Here, this case screams out for the Court to exercise its gate-keeping
function. The Trustee could not possibly have exercised reasonable litigation judgment, because
he did no fact investigation before filing this case.
Indeed, to this day, the Trustee remains wholly ignorant of the factual basis for even the
most fundamental allegations in his Complaint. The Trustee’s response to Defendants Rule 56.1
Statement of Facts acts only to confirm this. Specifically, Defendants’ Statement of Facts
included 23 separate factual statements concerning the Trustee’s lack of knowledge about his
own malpractice complaint. The Trustee effectively provided the same stock response to each of
those 23 factual statements. (See 56.1 Resp. at ¶¶69-90, 92.) For example:

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77.
The Trustee is not aware of any potential financing
available to CMGT as of September 29, 2003, other than the
Trautner Deal and the alleged deal with the Washoe. ([Trustee
Dep.] at 279.)
RESPONSE: Plaintiff admits only that, during his
deposition, he was not aware of potential financing available to
CMGT as of September 29, 2003, other than the Trautner Deal and
the negotiations with the Washoe. Plaintiff does not admit that no
other financing was available as of September 29, 2003. . . . (56.1
Resp. at ¶77.)
There are so many things wrong with that Response. For example, if the Trustee did not know
this fact at his deposition, he surely did not know it when he filed suit. Also, it is not relevant
that, on an unverified basis, the Trustee “does not admit that no other financing was available as
of September 29, 2003 other than the Trautner Deal and the alleged deal with Washoe.” The
point is that nowhere (and certainly not under oath) does the Trustee deny that the only financing
available as of September 29, 2003 was the Trautner Deal and the alleged deal with Washoe (a
deal the Trustee now admits was never even offered to CMGT), even though his Complaint
alleges that Defendants “negligently pushed” CMGT into accepting to the Trautner Deal when
there were other better financing deals available to CMGT.
These responses are wholly inadequate to defeat summary judgment. They act only to
reinforce the Trustee’s lack of knowledge concerning the critical facts alleged in his Complaint.
And, without such knowledge, it is impossible for the Trustee to have exercised any litigation
judgment -- let alone the reasonable litigation judgment required by Maxwell.
In the end, the Response does not contest the Court’s conclusion that this case is “very
odd,” nor deny that a fact investigation was needed. The Trustee submits no affidavit showing
that he did any investigation, nor does he say that someone else did one for him -- to the

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contrary, he disclaims any reliance on any investigation by counsel.4 The Trustee cites no case
stating that he has no responsibility for making sure his allegations are accurate. He does not
explain why he did not interview any of the key witnesses or why all of them flatly refute his
basic allegations. He does not explain why he testified that he does not know the factual basis
for the major allegations of his Complaint. He does not explain why critical facts in his
Complaint -- e.g., that Sealaska and the Washoe offered CMGT financing -- are flat-out wrong.
(Compare Compl. ¶¶33, 45, with 56.1 Resp. at ¶¶23-25, 75-76.) He does not explain the
communications he received from Spehar noting the lack of any investigation by the Trustee or
his counsel and recommending that the Trustee “scare” witnesses so as to “extract real value”
from them. (56.1 Resp. ¶¶140-47.) He does not explain why he then threatened Franco and
Wong with litigation and forced them to sign tolling agreements in an (unsuccessful) effort to
“scare” them into supporting the Trustee’s suit against Defendants, just as Spehar suggested.
(Id.) Instead, and quite incredibly, the Response says that the Trustee’s failure to make a prefiling investigation is “irrelevant” and states:
as [Defendants] know, [the Trustee’s] pre-filing role was to (a)
obtain the most reliable source of the underlying occurrence facts
-- the contemporaneous documents generated in the time period
leading up to and after the filing of Spehar Capital, LLC’s
(“Spehar’s”) California lawsuit against CMGT, Inc. (“CMGT”);
and (b) rely on his special counsel’s analysis of whether those
occurrence facts support causes of action against Defendants.
(Resp. at 1.)
The Trustee cites no legal authority for his limited “pre-filing role” or right to rely solely on
counsel’s analysis. And, then, in a footnote, the Trustee directly contradicts himself by stating:

4

As demonstrated in the Opening Brief (at 26-27), there is considerable evidence that the
Trustee’s counsel did no meaningful fact investigation either.
13

To be clear, however, [the Trustee] is not asserting an advice of
counsel defense to Defendants’ Motion. As this Court will see,
[the Trustee] does not make any arguments that are based on (a)
privileged documents or communications or (b) advice of counsel.
(Id. at 1 n.2.)
What exactly is the Trustee trying to say? Did he or did he not rely on counsel? Does he
seriously maintain that he has no responsibility to investigate the facts before he files a
complaint?

Does he contend that, so long as he gathers what he considers to be

“contemporaneous” documents, he is free to draw any inferences from those documents that he
pleases, however far-fetched, does not have to know whether there are any facts that support his
inferences, and has no obligation to speak to any witnesses? And, even when it is so clear now
that those witnesses would have told him that his inferences were wrong? Does he contend that
he fulfils his duty to exercise “reasonable litigation judgment” when he has no idea what, if any,
facts support the litigation that is brought in his name? Does he contend that he can “rely” on his
counsel’s “analysis” of the “occurrence facts” without knowing any of the facts himself and
without putting his attorney’s analysis at issue? Does that mean that he can keep the facts that
allegedly support his case a secret so long as he does not know what they are and never asks his
attorneys to disclose them to him? Perhaps most fundamentally, does the Trustee believe that a
bankruptcy trustee is nothing more than a figurehead who can subcontract litigation out to
contingency fee attorneys and have no responsibility for the allegations they make?
The Trustee cites no legal authority to support any of these far-fetched contentions -- and
there is none. Instead, Maxwell plainly states that: (a) bankruptcy trustees must act responsibly
before filing litigation; and (b) the district courts are required to supervise them. The facts
clearly show the Trustee did not act responsibly. Instead, he deliberately cloaked himself in

14

ignorance and made wild, illogical accusations that he never investigated and had no evidence to
support. Under Maxwell, this case should be dismissed.
In response, the Trustee argues that there are “issues of fact” arising from snippets of
documents. Under Maxwell, the question is not whether the Trustee can raise issues of fact by
reading parts of documents in isolation, but whether the Trustee exercised reasonable litigation
judgment in bringing a case. Here, all the evidence shows that if the Trustee had done even a
modest investigation, such as talking to CMGT’s former management and shareholders, he
would have realized that his tortured interpretation of the documents was wrong (and
inconsistent with his own statements) and that his case has no reasonable basis.5
Finally, even after filing this case, the Trustee did virtually no discovery as to the
Unclean Hands issue. So, just as he buried his head in the sand before filing this case, the
Trustee did the same thing during this case. Although he relies on his own tortured interpretation
of e-mails and letters, he chose not to depose their authors to find out if his interpretation was
correct. From the cradle to the grave, the Trustee made a tactical decision to remain ignorant of
key facts so that he can continue his refrain that one can interpret his documents (albeit in an
inconsistent and illogical manner) to support his case.
Under Maxwell, the Trustee is required to conduct a factual investigation to ensure that
his case is reasonable. His failure to do so is yet another, independent reason why this case

5

The Trustee argues that this Court found that the documents attached to his Complaint
“support” him. Not so. The Court simply denied Defendants’ motion to dismiss and rejected
their argument that the exhibits to the Trustee’s Complaint refuted the Trustee’s claims. (June
28, 2007 Mem. Op. & Order, d/e 49, at 14-18.) That preliminary ruling places no limits on the
Court’s ability to grant this summary judgment motion. Indeed, despite such exhibits (or maybe
in part because of them), the Court found this case to be “very odd.”
15

should be stopped. Once again, the Court need read no further because any (or all) of the three
foregoing arguments is sufficient to grant the Unclean Hands Motion in its entirety.
IV.

THE TRUSTEE’S “MERITS” ARGUMENTS ARE
IRRELEVANT TO THIS MOTION; ALTERNATIVELY,
THEY FURTHER DEMONSTRATE THAT THE TRUSTEE
DID NOT MAKE AN ADEQUATE INVESTIGATION AND
DID NOT EXERCISE REASONABLE LITIGATION JUDGMENT
As we said before, the Unclean Hands Motion is not a motion “on the merits.” Yet,

unable to deal with -- or create an issue of fact with respect to -- the real issues presented by the
Unclean Hands Motion, and in an effort to distract the Court from those real issues, the Trustee
spends almost the entire Response trying to convince the Court that the Trustee is right on the
“merits.” In doing so, the Trustee is trying to change the subject and avoid confronting Maxwell
and its warnings. But, as with any other motion that seeks to avoid the plaintiff’s claim at the
outset -- such as motions based on statutes of limitations, governmental immunity or failure to
exhaust administrative remedies -- the underlying “merits” of the claim and whether there is an
issue of fact with respect thereto are simply irrelevant.
Indeed, the standard for deciding whether there is a question of fact relating to the
“merits” is different than the Maxwell standard. For example, a trustee might file a case where
the outcome-determinative fact is supported by the self-serving testimony of only one interested
witness, but denied by ten disinterested witnesses. While such a case might technically present a
disputed question of fact precluding summary judgment on the merits, that does not mean that it
was reasonable or logical for the trustee to pursue that case in the face of such overwhelming
evidence and odds. Indeed, the only party that would pursue such a case is one that -- like a
trustee -- has nothing to lose, is not paying any costs and could get a fee if a settlement is
somehow extracted. That is exactly the reason for the warnings in Maxwell.

16

The irrelevance of the “merits” is further confirmed by the Trustee’s actions in discovery
on the Unclean Hands issue. A full 71 of the 109 exhibits cited in the Response (i.e., those
without bates numbers) were neither received nor produced by the Trustee in discovery. (See
Affidavit of LaVerne M. Dietch ¶3, attached hereto as Ex. A.) Those documents were obtained
by the Trustee outside discovery, and the Trustee was required to produce them in discovery if
requested by Defendants. This is so even if the Trustee thought Defendants had their own copies
thereof. See Goss Int’l Americas, Inc. v. Graphic Mgmt. Assoc., Inc., No. 05 C 5622, 2007 WL
161684, at *2 n.4 (N.D. Ill. Jan. 11, 2007) (party must produce documents even though
requesting party may already have them).

Here, Defendants requested a broad range of

documents that would encompass any documents relating to the Unclean Hands issue. (See
Lawyer Defendants’ First Set of Document Requests Regarding Unclean Hands Issue at 5-6,
attached hereto as Exhibit B.) The fact that the Trustee did not produce these 71 documents in
discovery confirms that he, too, agreed that the “merits” were not relevant to the Unclean Hands
issue. That also shows that the Trustee’s motive in raising his “merits” arguments is to cause
confusion as to the Unclean Hands Motion in the hope of avoiding summary judgment thereon.
Because they are irrelevant, the Court should not consider the Trustee’s “merits”
arguments, and the Unclean Hands Motion should be granted for the reasons set forth previously.
Alternatively, even if the Court were to consider those arguments, the Unclean Hands Motion
should still be granted. Those arguments confirm what we already know -- that the Trustee did
not do an adequate pre-filing investigation and did not exercise reasonable litigation judgment in
pursuing this case.

Accordingly, this Section will address the Trustee’s three “merits”

arguments, but only to show why they further confirm that which has already been demonstrated
-- i.e., that the Trustee did not exercise reasonable litigation judgment, as required by Maxwell.
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A.

Claim One: Pre-Litigation Advice and Strategy

So-called “Claim One” focuses on Defendants’ pre-Spehar Lawsuit conduct, alleging that
Defendants negligently advised CMGT to “ignore” the Spehar dispute, made no “reasonable
effort” to settle it, and “devised a conflicted strategy for dealing with [it].” (Resp. at 16.) Yet,
the assertion that Defendants ignored the dispute and made no reasonable effort to settle it is
defeated by Franco’s uncontested testimony: (i) that Defendants did not tell him to ignore the
case; (ii) that Defendants did advise him to settle it; and (iii) that he tried, but his efforts were
unsuccessful because of Spehar’s unreasonable demands, CMGT’s limited assets, and the
CMGT shareholders’ unwillingness to raise funds or make concessions to Spehar, whose claims
they regarded as meritless. (Defendants’ Local Rule 56.1(a) Statement of Undisputed Facts in
Support of Their Motion for Summary Judgment Based on Their Unclean Hands Defenses 56.1
(“SOF at ¶__”) at ¶¶116-18.) The affidavits of Baliga, Quarles and Wong confirm that CMGT
had no assets to settle with and that its shareholders were not willing to contribute funds for that
purpose. (SOF at ¶¶116-18.) Indeed, CMGT’s lack of assets was confirmed by the Trustee
himself in his Bankruptcy Affidavit, his draft letter to Spehar’s counsel, and his deposition
testimony. (SOF at ¶¶67, 137-38.)
In seeking to raise an “issue of fact,” the Trustee cites various emails and letters
Defendant Ronald Given (“Ronald”) sent to Franco, which, according to the Trustee, say that
Spehar’s claims were “meritless” and that Franco should “ignore” certain communications from
Spehar. So what? It is not malpractice for a lawyer to express his judgment that claims against a
client are meritless. Goldstein v. Lustig, 507 N.E.2d 164, 168 (Ill. App. Ct. 1987) (“Illinois
adheres to the rule that an attorney is not liable to his client for errors in judgment.”). Moreover,
Franco, Baliga, Quarles and Wong have testified -- and at least four other CMGT shareholders

18

who wrote letters to the Trustee agree -- that they believed that Spehar’s claims were meritless.
(SOF at ¶¶117, 127-34.) In fact, the Trustee cannot win this case unless he proves that Spehar’s
claims would have lost. Tri-G, 856 N.E.2d at 395; Merritt, 841 N.E.2d at 1010. So, in the end,
the Trustee is arguing -- without any supporting law -- that a lawyer is guilty of malpractice if,
prior to litigation, he does not force his client to settle a meritless claim.
There is also no support for the Trustee’s theory that Defendants had a duty to continue to
press CMGT to settle after it became clear that Spehar’s settlement demands were unreasonable,
that CMGT had no assets with which to settle and that CMGT’s shareholders would not pay
money to settle them. (SOF at ¶¶117-118.) In light of these facts, there also was nothing wrong
with Ronald suggesting that Franco “ignore” Spehar’s continuing demands.
The Trustee admits CMGT had no money, but says Spehar did not demand a pre-closing
payment, so Defendants should have pursued settlement. (Resp. at 21-22.) Again, CMGT did
pursue settlement, but was unsuccessful. In all events, it is pure speculation -- unsupported by
any evidence -- for the Trustee to argue that Spehar was not demanding a pre-closing payment,
to imply that its demands were modest or to presume that the matter could have settled. Franco
testified that he asked Spehar to wait until the Trautner Deal closed before filing suit and that
Spehar refused. (Franco Aff., Appendix Ex. B, ¶15.) Moreover, although Gerry submits an
(irrelevant) affidavit, he did not testify that he was not demanding a pre-closing payment, that he
was making only a modest demand or that there was any basis on which he would have agreed to
settle. Indeed, Spehar’s pre-suit demand letters put the lie to any such suggestion. (Resp. Ex.
39; Resp. Ex. 28 at 1 ¶7; see also Compl. Ex. 8 at 2; Compl. Ex. 12 at 2.)
The Response (at 21 & Ex. 28) also says that Ronald told Spehar to “bring it on.” There
is no affidavit or deposition testimony stating that Ronald made this statement. It is merely an
19

allegation in an unauthenticated, double hearsay email that Spehar wrote. See Schindler v.
Seiler, 474 F.3d 1008, 1010 (7th Cir. 2007) (hearsay evidence may not be used to defeat
summary judgment). It is also irrelevant, because, as even the Response agrees (at 20), Franco
(CMGT’s President) was “of one voice” with Ronald. Further, any such statement was intended
to get Spehar to back off and was a matter of strategy or judgment, which is not actionable
whether it worked or not. E.g., Goldstein, 507 N.E.2d at 168. Indeed, courts do not sit as micromanagers who pass judgment on every statement a lawyer makes to his client’s adversary.
In all events, no statement by Ronald caused CMGT any damages. There is no evidence
that Spehar filed suit because of Ronald’s statement as opposed to its own belief that it was
entitled to a commission for the Trautner Deal. Moreover, even if Ronald’s alleged statement
did cause Spehar to file suit, CMGT could have avoided the Default Judgment and any other
alleged damages from the Spehar Lawsuit simply by defending itself. Ronald is not responsible
for CMGT’s inability to raise funds for a defense. In short, Claim One is precisely the sort of
illogical claim that no reasonable trustee should bring. See Maxwell, 520 F.3d at 718.
B.

Claim Two: The Washoe Negotiations

So-called “Claim Two” is that Defendants are guilty of malpractice because, by
decreasing the Washoe’s due diligence period by one day, Defendants prevented CMGT from
getting financing from the Washoe. As a preliminary matter, it is uncontested that Franco,
CMGT’s President, approved reducing the Washoe’s due diligence period by one day. (Resp.
Exs. 52-53.) It is not legal malpractice for an attorney to follow the client’s wishes.
Also, the Court should not give any credibility whatsoever to the so-called “Washoe”
claim. The Trustee’s Complaint stated that the Washoe had signed a letter of intent to loan
CMGT money, that a signed copy thereof was attached to the Complaint as Exhibit 6, and that

20

Defendants ignored this signed letter of intent because Trautner (as opposed to the Washoe)
promised to pay their fees. (Compl. ¶45.) Yet, Exhibit 6 is not signed, and it is undisputed that
there never was any signed letter of intent from the Washoe. (56.1 Resp. at ¶23.) The Trustee
never even asked to see a signed letter of intent before alleging there was one. (Id. at ¶78.) To
the contrary, Spehar told the Trustee’s counsel that the Complaint was wrong on this point (id. at
¶24), but, now three years later, the Trustee still has not corrected it. (Id. at ¶25).
On a related point, Defendants’ written retention agreement with CMGT states that
Defendants’ fees will be paid when CMGT gets financing, regardless of who provides it. (56.1
Resp. at ¶11.)

Thus, Defendants would not care who provided the financing -- the Washoe,

Trautner or anyone else -- and the Trustee’s assertion that Defendants favored the Trautner Deal
(as opposed to a deal with the Washoe) because only the Trautner Deal got them paid is illogical.
Indeed, Ronald made it clear that he was willing to work on the Trautner Deal or any other deal
for CMGT. (Resp. Ex. 16 at 1 ¶1.) In fact, if the Washoe were truly interested in providing
CMGT with financing, then Defendants should have preferred a deal with the Washoe over the
Trautner Deal. After all, the Trautner Deal, as approved by CMGT’s shareholders, would not
have put so much as one dollar into CMGT’s pockets -- all it offered was a 20% interest in
Newco and, at most, a promise from Trautner to work something out as to payment for some of
Defendants’ fees. (56.1 Resp. at ¶¶27, 30.) In contrast, if real, the Washoe deal would have put
millions of dollars into CMGT’s pockets, thus enabling CMGT to pay Defendants the full
amount of their fees. (Compl. Ex. 6 at 1.)
Still further, Franco testified that Defendants did everything that he asked of them with
respect to the Washoe. (SOF at ¶110.) Franco also explained that he made a business decision
that CMGT would not delay matters and/or risk losing the Trautner Deal just to see if the
21

Washoe eventually would sign a letter of intent (id. at ¶¶111-12) -- which, by its own terms,
would have been non-binding, subject to further due diligence and self-terminating without
recourse if the deal did not close (Compl. Ex. 6). And, CMGT’s other shareholders agreed with
Franco’s decision. For example, Baliga and Wong testified that they and shareholders they
spoke with agreed. (See Baliga Aff., Appendix Ex. C, ¶¶3, 5; Wong Aff., Appendix Ex. E, ¶¶3,
4.) Who can blame them? As Wong testified, Spehar had been promising CMGT financing for
three years with no results -- why should this time be any different? (Id.)
Despite this uncontested evidence, the Trustee says that documents show that Defendants
violated their duties to CMGT. However, the Trustee’s documents do not offer any support for
his theory. For example, the Trustee relies on one e-mail in which Franco said that -- as of
August 13, 2003 -- he thought the Washoe’s interest in financing CMGT was “real.” (Resp. Ex.
21 at 2.) No matter. Apart from being inadmissible hearsay, Franco’s statement does not mean:
(1) that the Washoe’s interest actually was or remained “real;” (2) that Franco could never reevaluate his belief; or (3) that Franco could not later decide not to pursue financing from the
Washoe because: (a) CMGT’s and his own financial condition worsened; (b) Spehar disobeyed
Franco’s instructions in dealing with the Washoe; and (c) the Washoe said that they were “not in
the business of investing in companies like CMGT.” (See Franco Aff., Appendix Ex. B, ¶¶34.)
Once again, the Trustee has submitted no evidence to support this far-fetched claim. In
particular, he did not talk to Franco to learn why he did not give the Washoe more time, did not
ask Ronald what the Washoe told him, did not submit any testimony from the Washoe stating
that they terminated financing negotiations because they wanted a due diligence period that was
one day longer, and did not submit testimony from any member of the Trautner Group stating
that they were willing to wait until the Washoe made up their minds. In short, the Trustee’s
22

arguments are unsupported, implausible, and contradicted by all the known evidence. The
Trustee has not exercised reasonable litigation judgment by bringing such a factually bereft
claim.
C.

Claim Three: Defendants Should Have Advised CMGT To Defend Itself

So-called “Claim Three” is little more than a repeat of Claim One. Instead of saying that
Defendants should have advised CMGT to settle with Spehar before Spehar filed suit, Claim
Three says Defendants should have given that advice after Spehar filed suit. (Resp. at 25.)
Yet, again, Franco testified that Defendants did advise him to settle with Spehar and that
he tried to settle and failed for the reasons explained earlier. Franco also testified that CMGT’s
shareholders were not willing to contribute money to settle or litigate with Spehar. (SOF at
¶118.) Franco’s testimony is supported by affidavits from three additional CMGT officers
and/or shareholders, and there is no evidence to the contrary. (Id.) All that is left of the
Trustee’s third claim is his argument that Defendants should have advised CMGT to encourage
“Trautner’s investment group to contribute to a defense fund.” (Resp. at 25.) Again, this is not
legal advice. Defendants do not have a duty to tell CMGT where to get money to defend itself.
In all events, there is no evidence -- or reason to believe -- that CMGT and Trautner’s
investment group did not already know that Trautner’s group was a potential source of financing
to defend the Spehar Litigation. It is also pure speculation that the Trautner group would have
advanced defense costs even if asked. To the contrary, they did not do so on their own, even
though they knew that not defending could kill their deal. This claim, too, is not the product of
reasonable litigation judgment.
D.

The So-Called Nine-Point Memo

The Trustee’s final argument (advanced as part of Claims One and Three) is that
Ronald’s so-called “Nine-Point Memo” (the “Memo”) somehow evidenced a conflict of interest.
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But, whether that is so or not (and it is not), a conflict of interest alone does not constitute legal
malpractice. Rather, all of the elements of legal malpractice -- including causation and damages
-- must be present. Owens v. McDermott Will & Emery, 736 N.E.2d 145, 156-57 (Ill. App. Ct.
2000). Here, there could be no such causation or damages.
Indeed, the Memo merely presented a possible strategy in light of Spehar’s threatened
lawsuit and TRO. Yet, setting forth a possible strategy is not actionable, particularly where, as
here, there is no evidence that the strategy was ever carried out. Among other things, there is no
evidence that Newco was ever created, that Ronald ever did any legal work for Newco, or that
Franco ever went to work for the Trautner group. Likewise, there is no evidence that CMGT or
Trautner’s group would have done anything differently if the Memo did not exist. The Trustee’s
reference to the Memo wrongly attempts to create a malpractice claim out of whole cloth -without explaining the theory behind the claim or identifying any authority that supports it.
There was also nothing wrong with Ronald asking to be paid. By this time, Mayer
Brown had already incurred unpaid fees well in excess of the cap agreed to in the engagement
letter. (Compare Compl. Ex. 1 at 2 ($50,000 cap) with Resp. Ex. 62 (over $200,000 in fees
accrued).) Before embarking on a new project -- i.e., trying to keep the Trautner Deal alive
despite Spehar’s threatened Lawsuit -- Ronald simply wanted to make sure he was not getting
involved in more free work. A lawyer is not required to take on each successive new project
from the client ad infinitum despite the fact that the lawyer has never been paid and has already
exceeded the amount of fees the lawyer agreed to accrue before being paid.
In all events, neither the Default Judgment nor CMGT’s going out of business was the
result of Defendants’ conduct. They were the result of: (1) a business that lost all its money; (2)
a financial advisor who never found it any additional money; (3) a lawsuit that chased away
24

Trautner -- CMGT’s last chance; and (4) the very sensible decision of CMGT and its
shareholders not to throw more good money after bad -- either by paying Spehar when they
thought it deserved nothing or by engaging in pointless litigation in California -- but, instead,
simply to have CMGT, a corporation with limited liability, go out of business. The Trustee had
the option to close this case as a no-asset bankruptcy. (Trustee Dep. at 118.) Instead, he ignored
the evidence, did no investigation, refused to vacate the Default Judgment and subcontracted the
case to Spehar and contingency fee counsel who engineered this illogical and baseless lawsuit.
*

*

*

Having addressed the Trustee’s “merits” arguments, Defendants hasten to repeat that they
did not need to do so, and that this Court should ignore the “merits” arguments as irrelevant to
the Unclean Hands Motion. Instead, the Court should focus on -- and grant the Unclean Hands
Motion -- for any one or more of the three separate and independent reasons set forth in Sections
I, II and III above. Of course, should the Court nevertheless entertain the “merits” arguments,
that should only further confirm those three reasons and that the Unclean Hands Motion should
be granted.
Respectfully submitted by,
MAYER BROWN LLP and RONALD B. GIVEN

By:

25

/s/ Stephen Novack
One Of Their Attorneys

CERTIFICATE OF SERVICE
Stephen Novack, an attorney, hereby certifies that he caused a true and correct copy of
the foregoing Reply Memorandum in Support of Their Motion for Summary Judgment on Their
Unclean Hands Defenses to be served through the ECF system upon the following:
Edward T. Joyce
Arthur W. Aufmann
Robert D. Carroll
Edward T. Joyce & Assoc., P.C.
11 South LaSalle Street
Chicago, IL 60603
on this 19th day of August, 2009.

/s/ Stephen Novack