Grochocinski v. Mayer Brown Rowe & Maw LLP et al

Filing 242

REPLY by Defendants Ronald B Given, Mayer Brown Rowe & Maw LLP to memorandum in support of motion 177 , motion for sanctions 176 Against David Grochocinski, Bankruptcy Trustee for CMGT, Inc. (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 CV 05486
District Judge Virginia M. Kendall

DEFENDANTS’ REPLY IN SUPPORT OF THEIR MOTION FOR SANCTIONS
AGAINST DAVID GROCHOCINSKI, BANKRUPTCY TRUSTEE FOR CMGT, INC.

Stephen Novack
Mitchell L. Marinello
Stephen J. Ciszewski
NOVACK AND MACEY LLP
100 N. Riverside Plaza
Chicago, IL 60606
[phone]
Doc. No. 421926

TABLE OF CONTENTS
Page
ARGUMENT ...................................................................................................................................1
I.

THIS COURT HAS THE INHERENT
AUTHORITY TO SANCTION THE TRUSTEE ...............................................................1
A.

The Trustee’s Response Misstates the Law .............................................................1

B.

In All Events, The Trustee’s Bad
Faith Continued During the Litigation.....................................................................5

II.

THE COURT’S INHERENT
AUTHORITY IS NOT PREEMPTED BY RULE 11 .........................................................7

III.

WILLFULNESS ..................................................................................................................9
A.

The Willfulness Standard Should Not Apply Here..................................................9

B.

Definition of Willful ..............................................................................................11

C.

This Court’s Findings In Its Opinion Amply
Demonstrate That The Trustee Acted Wilfully
Or -- At the Very Least -- Was Willfully Blind .....................................................12

D.

The Court Should Reject the
Trustee’s Self-Serving Declaration ........................................................................15

E.

The Bankruptcy Court’s Approval of Joyce’s
Retention Does Not Insulate The Trustee From Sanctions ....................................19

F.

The Trustee’s Later Dispute With Spehar Is Irrelevant .........................................19

CONCLUSION ..............................................................................................................................20

TABLE OF AUTHORITIES
Page
Cases
In re Aimster Copyright Litigation,
334 F.3d 643 (7th Cir. 2003) .................................................................................... 11, 18
Chambers v. NASCO, Inc.,
501 U.S. 32 (1991) ............................................................................................ 1, 2, 4, 7, 8
In re Chicago Pacific Corp.,
773 F.2d 909 (7th Cir. 1985) ...................................................................................... 9, 10
In re CMGT, Inc.,
424 B.R. 355 (Bankr. N.D. Ill. 2010) ............................................................................. 20
Davis v. MCI Communications Services., Inc.,
421 F. Supp. 2d 1178 (E.D. Mo. 2006)............................................................................. 5
Desnick v. American Broadcasting Cos.,
233 F.3d 514 (7th Cir. 2000) .......................................................................................... 11
In re Gorski,
766 F.2d 723 (2nd Cir. 1985)............................................................................................ 9
Kovilic Const. Co. v. Missbrenner,
106 F.3d 768 (7th Cir. 1997) ............................................................................................ 9
Mach v. Will County Sheriff,
580 F.3d 495 (7th Cir. 2009) .................................................................................... 2, 6, 8
In re Markos Gurnee Partnership,
182 B.R. 211 (Bankr. N.D. Ill 1995) .............................................................................. 19
Maxwell v. KPMG LLP,
Case No. 07-2819, 2008 WL 6140730 (7th Cir. Aug. 19, 2008)................... 10, 12, 13,14
Maxwell v. KPMG LLP,
520 F.3d 713 (7th Cir. 2008) .......................................................................................... 10
Methode Eletronics v. Adam Technologies, Inc.,
371 F.3d 923 (7th Cir. 2004) .................................................................................... 2, 3, 8
Mosser v. Darrow,
341 U.S. 267 (1951) .......................................................................................................... 9

ii

In re Rigden,
795 F.2d 727 (9th Cir. 1986) ............................................................................................ 9
Roadway Express, Inc. v. Piper,
447 U.S. 752 (1980) .......................................................................................................... 2
Schoenberger v. Oselka,
909 F.2d 1086 (7th Cir. 1990) ...................................................................................... 5, 8
In re Shala,
251 B.R. 710 (N.D. Ill. 2000) ......................................................................................... 11
In re Thirtyacre,
36 F.3d 697 (7th Cir. 1994) ............................................................................................ 11
United States v. American Home Assurance Co.,
98 C 0995, 1999 WL 61826 (N.D. Ill. August 9, 1999) ............................................... 4, 5
Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co.,
313 F.3d 385 (7th Cir. 2002) ........................................................................................ 3, 4
Statutes and Other Sources
28 U.S.C. § 523 ........................................................................................................................... 11
Black’s Law Dictionary (8th ed. 2004)....................................................................................... 11

iii

Defendants Mayer Brown LLP (“Mayer Brown”) and Ronald B. Given (“Ronald”)
(collectively, “Defendants”), by their attorneys, Novack and Macey LLP, submit this reply
memorandum in further support of their motion for sanctions against David Grochocinski (the
“Trustee”), who is the trustee for the bankruptcy estate of CMGT, Inc (“CMGT”).1
ARGUMENT
In his response (“Trustee’s Response” or “T.Resp. at __”), the Trustee raises three
principal arguments in an effort to avoid sanctions. First, the Trustee contends that his wrongful
actions constitute “pre-litigation conduct” and that, as a matter of law, this Court does not have
the inherent authority to sanction him for such conduct. Second, he argues that Rule 11 governs
his wrongful conduct and preempts this Court’s inherent authority to sanction him for conduct
that Rule 11 covers. Third, he argues that his wrongful conduct was not willful and deliberate so
that sanctions are inappropriate. None of these arguments has any validity.
I.

THIS COURT HAS THE INHERENT
AUTHORITY TO SANCTION THE TRUSTEE
The Trustee’s main argument is that this Court does not have the inherent authority to

sanction him for “pre-litigation” conduct. (T. Resp. at 2-7.) The Trustee’s Response contends
(at 2) that the Court’s inherent authority to sanction litigants “extends only to a party’s behavior
in the litigation before the court, and the conduct cited by defendants took place prior to the
removal of this case from state court . . . .” This is wrong.
A.

The Trustee’s Response Misstates the Law

In Chambers v. Nasco, Inc., 501 U.S. 32, 57 (1991), the Supreme Court rejected the
Trustee’s argument that sanctions cannot be based on actions outside the court’s presence:

1

Capitalized terms used but not defined herein shall have the meaning given them
in Defendants’ Memorandum in Support of Their Motion for Sanctions (Docket No. 177) (the
“Opening Memorandum” or “Op. Mem. at __”.)

Chambers challenges the District Court’s imposition of sanctions
for conduct before other tribunals, including the FCC, the Court of
Appeals and this Court, asserting that a court may sanction only
conduct occurring in its presence. Our cases are to the contrary,
however. As long as a party receives an appropriate hearing, . .
the party may be sanctioned for abuses of process occurring
beyond the courtroom . . . .
The fact that the Trustee’s Response (at 4) cites a dissenting opinion in Chambers to support his
position is a dead give-away that the Trustee is incorrect. Indeed, even the Trustee’s recitation of
the applicable facts of Chambers (T.Resp. at 3) demonstrates that sanctions can be based on
conduct that predates the litigation. In Chambers, the sanctioned party was notified on a Friday
that the plaintiff would be filing suit and seeking a temporary restraining order the following
Monday. Over the weekend, the sanctioned party attempted to transfer the subject of the coming
lawsuit (a television station) to a trust so that it would be outside the court’s jurisdiction.
Sanctions were based on this pre-litigation conduct, and the sanctions award was affirmed by the
Supreme Court. Chambers, 501 U.S. at 36-37. Chambers defeats the Trustee’s argument.
Seventh Circuit decisions -- including those cited by the Trustee -- confirm this Court’s
power to sanction pre-filing conduct pursuant to its inherent authority. For example, in a case
cited in the Trustee’s Response (at 7), the Seventh Circuit recently held that “bad faith may occur
beyond the filing of the case and ‘may be found, not only in the actions that led to the lawsuit,
but also in the conduct of the litigation.’” Mach v. Will County Sheriff, 580 F.3d 495, 501 (7th
Cir. 2009) (emphasis added) (quoting Roadway Express, Inc. v. Piper, 447 U.S. 752, 766
(1980)).
The Trustee’s Response (at 7) accepts the decision in Methode Electronics v. Adam
Technologies, Inc., 371 F.3d 923, 927-28 (7th Cir. 2004), as an instance where the court properly
used its inherent power to sanction the plaintiff for litigation conduct because, the Trustee says,

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the plaintiff “intentionally filed a complaint with a false allegation in order to secure venue.”
Yet, as here, Methode involved wrongful actions taken in connection with the pre-filing
preparation of the complaint. In Methode, the wrongful action was creating a false basis for
venue; here, the wrongful action was creating a false and perverse basis for the lawsuit
altogether, including the failure to investigate whether there was any legitimate basis for the
claims being asserted. Methode stands for the proposition that litigants violate their duty to the
court system when they file a complaint that makes false allegations. Id. at 928. That is exactly
what the Trustee did here.
The Trustee relies on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313
F.3d 385 (7th Cir. 2002), but Zapata does not support his position. In Zapata, the district court
awarded attorney’s fees to a victorious plaintiff in a breach of contract case because the
defendant had no valid defense to the plaintiff’s claim, but did not admit liability and, thereby,
inconvenienced all concerned by requiring the case to be tried. The Seventh Circuit reversed,
holding that the district court did not have the authority to change state substantive law and
award attorney’s fees for breach of contract -- even if the defendant had no valid excuse for its
failure to honor the contract. Id. at 389-91. Importantly, unlike here, the party sanctioned had
not perpetrated a fraud on the court or violated any duty to the court system. Indeed, the Seventh
Circuit noted that the defendant had “acknowledged liability for $858,000 of the $890,000
sought in the complaint,” but the judge erroneously failed to grant the plaintiff’s motion for
partial summary judgment.

Thus, it was largely the district court’s fault that a trial was

necessary. Id. at 391.
Zapata stands for the principle that a district court cannot change substantive law and
grant an award of attorneys’ fees under the guise of a sanction just because it is offended by how

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the sanctioned party behaved in the underlying transactions that led to the parties’ dispute.
Zapata does not limit a court’s authority to sanction improper conduct that occurs in connection
with the preparation or filing of the complaint or any other action that concerns the court system,
regardless of when that improper conduct took place.
The Seventh Circuit explained this distinction when it said that a court’s inherent
authority can be used to punish misconduct “occurring in the litigation itself not in the events
giving rise to the litigation (for then the punishment would be a product of substantive law -designed, for example, to deter breaches of contract) . . .” Id. (emphasis added). Of course,
“events giving rise to the litigation” consisted of the breach of contract, not pre-litigation
investigation or preparation of court pleadings. The Trustee’s Response (at 5) quoted this
language, but omitted the phrase “not in the events giving rise to the litigation” without
indicating the omission.

Because this very language explains the distinction between

sanctionable and non-sanctionable conduct, it is highly suspicious that the Trustee omitted this
portion of the quote. Indeed, this same distinction is recognized in Chambers, 501 U.S. at 54,
where the Supreme Court noted:
. . . the District Court did not attempt to sanction petitioner for
breach of contract, but rather imposed sanctions for the fraud he
perpetrated on the court and the bad faith he displayed toward both
his adversary and the court throughout the course of the litigation.
In a similar vein, the Trustee’s Response (at 7) cites United States v. American Home
Assurance Co., 98 C 0995, 1999 WL 618216, at *2 (N.D. Ill. August 9, 1999), and declares:
Perhaps most telling of all is United States v. American Home
Assurance Co., . . . in which the court denied attorneys’ fees
sought by plaintiff against defendant for refusing to investigate
plaintiff’s claim, specifically on the ground that the inherent power
to enter sanctions does not extend to pre-litigation conduct.

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Once again, the “pre-litigation” conduct at issue in American had nothing to do with any
attempted fraud on the court or manipulation of the judicial process. Am. Home, 1999 WL
618216, at *1. Rather, as in Zapata, the plaintiff alleged that the defendants acted in bad faith by
breaching an underlying contractual obligation to pay plaintiff and having no valid excuse for
that breach. Am. Home, 1999 WL 618216, at *1
It also does not matter that this case was originally filed in state court and then removed.
Although it is true that Rule 11 does not apply to the filing of a state-court complaint when the
case is later removed to federal court, e.g., Schoenberger v. Oselka, 909 F.2d 1086, 1087-88 (7th
Cir. 1990), the Court’s inherent authority to sanction bad faith conduct is not subject to the same
restriction. E.g., Davis v. MCI Communications Servs., Inc., 421 F. Supp. 2d 1178, 1187-88
(E.D. Mo. 2006) (holding that the combination of Rule 11 and the Court’s inherent power gives a
federal court the authority to assess sanctions against a plaintiff for filing a non-meritorious
claim in state court that was removed to federal court). Indeed, the fact that Rule 11 cannot
reach this kind of conduct is one of the things that justifies the Court’s use of its inherent
authority.
In sum, although it is true that the Court cannot use its inherent authority to redress bad
faith that occurred in connection with the underlying events that gave rise to the parties’ dispute,
it can sanction bad faith conduct that occurred before the lawsuit was filed if that conduct is part
and parcel of the litigation and thereby implicates the party’s duty to the court system. The “prelitigation” misconduct by the Trustee is of the latter type and, therefore, is subject to sanctions.
B.

In All Events, The Trustee’s Bad Faith Continued During the Litigation

In all events, the Trustee’s bad faith was not limited to conduct occurring before the
litigation. Afterward, the Trustee continued to act as a “proxy for the real party in this case” -Spehar. (Op. at 19.) “Instead of taking control of the case as an independent reviewer of the
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matter, [the Trustee] merely took Spehar’s orders and followed them.” (Id. at 23.) “Spehar was
the puppetmaster and [the Trustee] his puppet.” (Id. at 24.) To take just a few examples, the
Trustee: (1) sat by while his lawyers, acting at Spehar’s urging, threatened witnesses with a
lawsuit if they did not buckle under; (2) smirked and joined in the fray when his attorneys tried
to obfuscate his deposition with improper objections and comments; (3) continued his lawsuit
long after the fundamental defects in his case were brought to his attention, fighting the motion
for summary judgment; and (4) never once tried to stop the runaway litigation that he started.
Such conduct -- which occurred during and throughout the litigation itself -- also is sanctionable
pursuant to the Court’s inherent authority. E.g., Mach, 580 F.3d at 501-02 (awarding attorney’s
fees pursuant to inherent authority when litigant “pressed all six of his arguments after discovery
had long ago revealed that five of the six were ‘worthless.’”)
Finally, the Trustee’s reliance (T.Resp. at 9) on an out-of-context portion of Magistrate
Judge Denlow’s resolution of a discovery dispute is misplaced.

Judge Denlow was not

addressing sanctions. Rather, he was dealing with the question of whether certain documents
that reflected communications between and among Spehar, the Trustee and/or the Trustee’s
counsel were discoverable or were protected work product. Ruling in the Trustee’s favor, Judge
Denlow decided that the documents were protected work product. In making his ruling, Judge
Denlow said that the documents reflected the pre-litigation actions of the Trustee and his counsel
as they prepared this case for filing.
Defendants do not dispute Judge Denlow’s finding. In fact, it makes Defendants’ very
point. In his preparation of the Complaint and his planning of this case, the Trustee met
extensively with Spehar and his private counsel and, as this Court found, thereafter acted as
“proxy” for Spehar “the real party in interest” in this case. By becoming Spehar’s “puppet”

6

instead of doing a proper investigation and by filing a perverse complaint with no factual or legal
basis, the Trustee violated his duties to the court system. As the many cases Defendants cited
show, pre-litigation conduct is sanctionable when it relates to the litigation itself and constitutes
a violation of the litigant’s duties to the court system and to the litigant’s adversary. The
Trustee’s pre-litigation behavior -- including his preparation and filing of a perverse complaint
and his utter failure to investigate the facts -- is sanctionable because, as this Court has found and
explained in great detail, the Trustee failed to meet his duties.
II.

THE COURT’S INHERENT AUTHORITY IS NOT PREEMPTED BY RULE 11
In Chambers, the Supreme Court recognized that a court’s inherent authority overlapped

with the power to sanction granted by various rules and statutes, including Rule 11. 501 U.S. at
47, 50. Nevertheless, the Court held that a federal court has the power to “sanction bad-faith
conduct by means of the inherent power” even if “that conduct could also be sanctioned under
the statute or the Rules.” Id. Chambers discussed the type of situation in which it would be
appropriate to invoke the Court’s inherent authority, even if other rules might apply. It stated
that, “when there is bad-faith conduct in the course of litigation that could be adequately
sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent
power.” Id. at 50. “But if in the informed discretion of the court, neither the statute nor the
Rules are up to the task, the court may safely rely on its inherent power.” Id. Thus, in
Chambers, the Supreme Court upheld the use of the district court’s inherent authority, even
though some of the conduct could have been punished under specific rules. Id. at 50-51. The
Court reasoned as follows:
Like the Court of Appeals, we find no abuse of discretion in
resorting to the inherent power in the circumstances of this case. It
is true that the District Court could have employed Rule 11 to
sanction Chambers for filing “false and frivolous pleadings,” 124
F.R.D. at 138, and that some of the other conduct might have been
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reached through other Rules. Much of the bad-faith conduct by
Chambers, however, was beyond the reach of the Rules; his entire
course of conduct throughout the lawsuit evidenced bad faith and
an attempt to perpetrate a fraud on the court, and the conduct
sanctionable under the Rules was intertwined within conduct that
only the inherent power could address. In circumstances such as
these in which all of a litigant’s conduct is deemed sanctionable,
requiring a court first to apply Rules and statutes containing
sanctioning provisions to discrete occurrences before invoking
inherent power to address remaining instances of sanctionable
conduct would serve only to foster extensive and needless satellite
litigation, which is contrary to the aim of the Rules themselves.
Id. (citing Advisory Committee's Notes on 1983 Amendment to Rule 11). Here, the Trustee,
like the Chambers plaintiff, embarked upon a “course of conduct” that “evidenced bad faith and
an attempt to perpetrate a fraud on the court.” Id. Though some of his conduct may be covered
by rules like Rule 11, other conduct, such as the filing of a perverse and frivolous complaint in
state court, is not. See Schoenberger, 909 F.2d at 1087-88. Moreover, the Trustee’s conduct as a
whole was designed to be “a deliberate manipulation of the judicial system.” (Op. at 31.) Thus,
the Court may invoke its inherent authority to sanction the Trustee without first determining
which rules might be applied to any specific part of the Trustee’s global misconduct. Chambers,
501 U.S. at 50-51.
Indeed, as the Seventh Circuit expressly held, “Rule 11 has not robbed the district courts
of their inherent power to impose sanctions for abuse of the judicial system.” Methode, 371 F.3d
at 927. Citing Chambers, the court further stated that “the [Chambers] Court was quite clear that
‘the inherent power of a court can be invoked even if procedural rules exist which sanction the
same conduct.’” Id. The court reached the exact same conclusion in Mach, 580 F.3d at 502.
Despite these clear precedents, the Trustee’s Response argues (at 7-8) that some of the
Trustee’s misconduct may have been covered by Rule 11 and that: “Inherent authority does not
extend to the entry of sanctions for conduct that is governed by federal rules of procedure.” Yet

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the very case that the Trustee’s Response cites (at 8) for this proposition -- Kovilic Const. Co v.
Missbrenner, 106 F.3d 768, 772 (7th Cir. 1997) -- says the exact opposite. In addressing
inherent authority to sanction, Kovilic states: “This power exists even where procedural rules
govern the same conduct.” Id. Even worse, this statement appears on the very same pages (i.e.,
772-73) the Trustee cited in support of his contrary position. To put it bluntly, every authority
cited by the Trustee contradicts his argument.
III.

WILLFULNESS
A.

The Willfulness Standard Should Not Apply Here

In this Circuit, a trustee may not be held personally liable for a breach of fiduciary duty
unless that breach was “willful and deliberate.” In re Chicago Pac. Corp., 773 F.2d 909, 915 (7th
Cir. 1985).2 In this case, Defendants are seeking sanctions against the Trustee for his bad faith
conduct in the litigation; they are not pursing a claim for breach of fiduciary duty. Neither
Chicago Pacific, nor any of the other reported cases cited by the Trustee in support of the
“willful and deliberate” standard, involved a situation where an opposing litigant was seeking
fees as a sanction. The willfulness standard set forth in those cases should not apply here.
The rationale for the Seventh Circuit’s rule of substantive law -- i.e., that when a trustee
is being sued for breaching his fiduciary duty, personal liability attaches only when that breach
was willful -- is that a trustee should have discretion and be protected from personal liability in
connection with his or her business judgments in managing a bankruptcy estate. However,
imposing sanctions on a trustee for abusing the judicial system is a totally different matter. It is a

2

The leading Supreme Court decision on this issue -- Mosser v. Darrow, 341 U.S.
267 (1951) -- has resulted in a circuit split, with some circuits imposing personal liability even
for negligent breaches of fiduciary duty. Compare Chicago Pac., 773 F.2d at 915 with In re
Rigden, 795 F.2d 727 (9th Cir. 1986) and In re Gorski, 766 F.2d 723 (2nd Cir. 1985).
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procedural remedy based on the trustee’s violation of duties to the court system, not a damage
award based on mistaken business decisions and damage to the bankruptcy estate.
Indeed, there is no reason why a bankruptcy trustee should have any lesser duty to the
court system than any other litigant. To the contrary, a bankruptcy trustee should have the same
obligation of good faith and the same obligation to conduct a proper investigation before filing
suit. Indeed, as an appointed representative of the bankruptcy court, a trustee should, if anything,
be held to a higher litigation standard. Consistent therewith, the Seventh Circuit has indicated
that courts must be “vigilant” against frivolous suits filed by bankruptcy trustees, noting:
The filing of lawsuits by a going concern is properly inhibited by
concern for future relations with suppliers, customers, creditors,
and other persons with whom the firm deals (including
government) and by the cost of litigation. The trustee of a defunct
enterprise does not have the same inhibitions. A related point is
that while the management of a going concern has many other
duties besides bringing lawsuits, the trustee of a defunct business
has little to do besides filing claims that if resisted he may decide
to sue to enforce. Judges must therefore be vigilant in policing the
litigation judgment exercised by trustees in bankruptcy, and in an
appropriate case must give consideration to imposing sanctions for
the filing of a frivolous suit.
Maxwell v. KPMG LLP, 520 F.3d 713, 718 (7th Cir. 2008) (“Maxwell I”).
The Trustee’s Response (at 14) cites to the Seventh Circuit’s unpublished follow-up
decision in Maxwell v. KPMG LLP, Case No. 07-2819, 2008 WL 6140730 (7th Cir. Aug. 19,
2008) (“Maxwell II”), in which the court applied the willfulness standard. In declining to hold
the trustee personally liable, Maxwell II found that there was no evidence that he “willfully
violated his fiduciary duties.” Id. at *4. The Trustee’s Response (at 14) says that Maxwell II
should be “highly persuasive.” Yet, Maxwell II did not address the distinction between the
trustee’s fiduciary duties, as addressed in Chicago Pacific, and the trustee’s very different duties
to the court system. Apparently, no argument relating to that distinction was presented.

10

Based on the foregoing, Defendants submit that the willfulness standard should not be
applied to the litigation conduct of bankruptcy trustees. Rather, in their role as litigants, trustees
should be held to the same standard of behavior as -- if not a higher standard than -- any other
party. If the Court agrees, it need not consider whether the abuses committed by the Trustee
were willful. Nevertheless, there can be no question that the Trustee’s actions were willful and,
if necessary, the standard has been met.
B.

Definition Of Willful

Neither Maxwell II nor Chicago Pacific provides a definition of “willful.” The term
“willful” is also not defined by the Bankruptcy Code. Black’s Law Dictionary defines “willful”
as “[v]oluntary and intentional, but not necessarily malicious.” Black’s Law Dictionary 1630
(8th ed. 2004). Black’s definition comports with the courts’ interpretation of the phrase “willful
and malicious” in Section 523(a) of the Bankruptcy Code. 28 U.S.C. § 523(a). Specifically, in
that Section of the Code, “willful means deliberate and intentional” whereas “malicious means in
conscious disregard of one’s duties or without just cause or excuse.” In re Shala, 251 B.R. 710,
713 (N.D. Ill. 2000) (quoting In re Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994).
In addition, in various contexts, courts have held that a party’s conduct can be deemed
willful, even if the party actually was ignorant, if that ignorance is the result of “willful
blindness.” E.g., In re Aimster Copyright Litig., 334 F.3d 643, 650 (7th Cir. 2003) (“Willful
blindness is knowledge, in copyright law . . . . as it is in the law generally.”) (citations omitted);
see also Desnick v. Am. Broad. Cos., 233 F.3d 514, 517 (7th Cir. 2000) (actual malice, for
defamation of a public figure, may be proved by willful blindness). As the Seventh Circuit
explained in Aimster:
One who, knowing or strongly suspecting that he is involved in
shady dealings, takes steps to make sure that he does not acquire
full or exact knowledge of the nature and extent of those dealings
11

is held to have a criminal intent, United States v. Giovannetti, 919
F.2d 1223, 1228 (7th Cir.1990), because a deliberate effort to
avoid guilty knowledge is all that the law requires to establish a
guilty state of mind.
Aimster, 334 F.3d at 650.
Based on the foregoing, even under Maxwell II, the Court may impose personal liability
on the Trustee for sanctions if it finds that his misconduct was voluntary and intentional or that
he stuck his head in the sand in order to render himself willfully blind.
C.

This Court’s Findings In Its Opinion Amply Demonstrate That The
Trustee Acted Willfully, Or -- At the Very Least -- Was Willfully Blind

This Court has already determined that “[t]he circumstances presented in this case reveal
a deliberate manipulation of the judicial system designed to benefit only one individual” -- i.e.,
Spehar. (Op. at 31; emphasis added.) Further, this Court found that Spehar “had the complicit
agreement” of the Trustee acting as Spehar’s “proxy” and “puppet.” (Id. 19, 24, 31.) In
furtherance of the scheme, the Trustee “agreed to proceed with the action to not only collect the
unsupported judgment but also to accuse attorneys who were in no way involved in the action to
be held responsible for the artificially inflated judgment.” (Id. at 22.) The Court found that the
Trustee was acting as Spehar’s “personal debt-collector . . . in order to fulfill [Spehar’s] personal
business grudge.” (Id. at 25.) The Court found that Spehar and the Trustee’s conduct before and
during the litigation was an attempt “to pervert the legal process.” (Id. at 32.)
The Court’s findings were based on an evidentiary record -- including, critically, the
Trustee’s 400-page deposition. (Id. at 23.) The Trustee argues that his conduct was not willful,
invoking the “empty head, pure heart” defense. This argument fails for several reasons.
First, it is patently unbelievable that, in these circumstances, the Trustee did not know
what he was doing. In addition to the foregoing factual findings, this Court also found that even
though the Trustee knew that it was in the interest of the estate to vacate the Default Judgment,
12

he failed to do so and, instead, immediately sided with Spehar. (Id. at 20.) The Trustee
“accepted [Spehar’s] funds, the lawyering, and Spehar’s theory without question, without
investigation, and without regard to his obligations to any other creditors or the estate.” (Id.)
The Trustee also permitted Spehar to run the show. He was aware that Spehar not only hired the
Trustee’s counsel but that Spehar spoke with him “more often than” the Trustee. (Id. at 22-23.)
The Trustee could not reasonably expect that the counsel selected and controlled by Spehar
would provide him with an independent evaluation of Spehar’s claim.
At the same time, the Trustee refused to listen to the chorus of voices raised against
Spehar and the filing of this suit. (Id. at 22.) As the Court found, based on these differing
allegations, the Trustee “should have known an investigation was warranted.”

(Id.)

Nevertheless, he failed to conduct any investigation. Instead, he pressed forward with this case,
claiming that Defendants committed malpractice by allowing a default judgment to be entered,
despite his actual knowledge that the judgment “‘was entered by default largely due to the lack
of funds by the debtor.’” (Id.) Indeed, the Trustee himself now argues that he could not vacate
the Default Judgment because CMGT’s bankruptcy estate lacked the funds to hire a California
attorney. (T.Resp. at 11.) Yet, with stunning hypocrisy, the Trustee alleged in his Complaint
that CMGT’s transactional attorneys in Illinois were blameworthy for not traveling to California
and litigating the entire California Action when CMGT did not have the funds to hire them
either.

In sum, the Trustee knew something was wrong with Spehar’s scheme from the

beginning, but he participated in it anyway.
Furthermore, the Trustee is not like the trustee in Maxwell II. There, the court noted that
the trustee “does not have any professional expertise in the areas of accounting or auditing
malpractice” and relied on “experts” to evaluate the case for him. Maxwell II, 2008 WL

13

6140730, at *4. The Trustee’s Response makes a parallel, but completely unbelievable assertion.
Specifically, it claims (at 13-14) that, despite his over 25 years of experience as a practicing
lawyer, he is ignorant of the law governing legal malpractice claims. It is one thing for a lawyertrustee not to have “professional expertise” in matters of accounting and auditing malpractice. It
is quite another for a lawyer-trustee to feign ignorance regarding legal malpractice. Indeed, if
the Trustee has no understating of legal malpractice, how does he avoid committing it? The
Trustees’ protestations of ignorance are simply outrageous.
Second, even if the Trustee’s claimed ignorance were genuine, such ignorance could only
be the result of willful blindness. Again, the Court already found that the Trustee “should have
known an investigation was warranted” in this case. (Id. at 22.) Indeed, the bizarre nature of
Spehar’s assertions and the contrary accounts of events from CMGT’s officers and employees
should have made him highly suspicious of Spehar’s motive and the validity of the story he was
telling. Nevertheless, based on the Trustee’s deposition, the Court found that the Trustee failed
utterly to conduct any investigation. As the Court wrote:
Throughout the hours of questioning, Grochocinski was
completely incapable of answering questions about the facts
underlying the case he brought other than to say that those facts
were presented to him from Spehar or through Spehar’s attorneys.
He cannot explain the source of the factual allegations regarding
the original agreement between CMGT and Spehar, the theory of
malpractice, and the financial status of CMGT.
*

*

*

Although Grochocinski’s attorney served more as a bully during
the deposition than a professional, his attempts to thwart the
answers from being given cannot hide the truth that his client had
conducted no independent review of the case and was incapable of
explaining his actions in bringing the matter.
(Id. at 23-24.) Indeed, the Court found that the Trustee acted on Spehar’s instruction to initiate
suit without investigation. (Id. at 11.) So, although he should have known an investigation was

14

necessary, the Trustee intentionally did nothing to educate himself about the glaring defects in
his case. The Court should thus find that, if the Trustee was so ignorant as he claims, his
ignorance was willful and, therefore, does not insulate him from sanctions.
D.

The Court Should Reject the Trustee’s Self-Serving Declaration

Despite the Court’s findings of fact, the Trustee submits a declaration with his Response -- supposedly “not to contradict the record but to place the events of this case into context.”
(T.Resp. at 11 & Ex. A.) The declaration, however, changes nothing. If anything, it reaffirms
the Court’s findings and demonstrates -- again -- that the claims the Trustee filed were baseless.
Specifically, in addition to confirming his lack of a factual investigation, the Trustee’s
declaration touts his ignorance of the law. (T.Resp. at Ex. A, ¶¶ 3, 12.) As noted, the Trustee
argues that he was incapable of assessing the merits of his claim because he is not a malpractice
lawyer.
However, it does not take a legal malpractice specialist to recognize that there is
something fundamentally wrong with the case the Trustee filed. One needs no more than a
simple understanding of the elements of a malpractice claim to know that the Trustee could
succeed only if he were able to prove that Spehar had no right to recover in the first place. But,
as soon as the Trustee proved this, he would have to hand over almost all of the recovery to
Spehar -- whom he just proved should not have received anything. That alone should have been
enough to stop this case before it got out of the starting block.
Yet, the Trustee’s ignorance went far beyond that. The Trustee’s claim was based on his
allegation that Defendants should not have allowed the Default Judgment to be entered. The
Trustee, however, needed no malpractice expertise to realize that CMGT had no funds to defend
against the California Action, and made a business decision to default. Indeed -- the Trustee
seeks to absolve himself from responsibility for not seeking to vacate the Default Judgment on
15

the grounds that this was a no asset bankruptcy estate. But the same was true when the
California Action was filed; CMGT had no assets at that time. Indeed, CMGT: (1) had operated
at a loss for three straight years and never turned a profit; (2) had run out of funds; (3) had lost
nearly all its employees and clients; (4) had not paid its sole remaining officer (Franco) a salary
in nearly two years; (5) was deeply in debt; (6) could not pay its ongoing expenses; and (7) had
failed for years to find new financing or to convince its shareholders to contribute more capital.
Many of these facts are recited in the Trustee’s own complaint and in the exhibits attached to it.
Because of its lack of resources and the financial exhaustion of its shareholders, CMGT chose
not to appear in the California Action for the very same reasons the Trustee used to explain why
he made no effort to vacate the Default Judgment. Why would it be permissible for the Trustee
not to seek to vacate the Default Judgment due to a lack of funds, but not permissible for CMGT
to decide not to defend a lawsuit in California when it had no funds and CMGT was a failing
business with no assets?3
Beyond that, how complicated would it have been for the Trustee, or any lawyer with 25
or more years experience, to investigate why Defendants did not rush out to California to defend
CMGT in Spehar’s lawsuit and how the Default Judgment came to be entered? If the Trustee
had so much as picked up the telephone and called Franco (CMGT’s Chief Executive Officer),
Wong (CMGT’s controller), Baliga (CMGT’s principal investor), Ronald, or any of the many
shareholders who tried to contact him before he filed suit, the Trustee would have learned the
truth.

3

One can only wonder why the Trustee’s Response (at 12 n.2) trumpets that the
Trustee did not research the law on vacating a default judgment until after he had already
allowed the time for doing so to pass.
16

For example, the Trustee would have learned the most critical fact -- i.e., that CMGT and
its shareholders did not hire Defendants to represent them in the California Action and did not
expect them to do so. In fact, six months before the Default Judgment was entered, Defendants
specifically told CMGT and each one of its shareholders in writing that they had not been
retained to represent CMGT in the California Action and that CMGT did not have the funds to
hire counsel to defend it. (Communications stating this were attached as Exhibits 15 and 16 to
the Trustee’s Complaint -- the Trustee either affirmatively chose not to read them or he ignored
what he read.) The Trustee would also have learned that Franco asked CMGT’s shareholders to
provide CMGT with the funds to hire counsel, but that CMGT’s shareholders did not think it was
worthwhile to do so. The Trustee also would have learned that Franco, Wong and Baliga
interviewed potential counsel to represent CMGT and vacate the Default Judgment, but could not
find anyone whom CMGT could afford. (See Defendants’ Local Rule 56.1(a) Statement of
Undisputed Facts in Support of Their Motion for Summary Judgment Based on Their Unclean
Hands Defenses (Docket No. 137), ¶ 126.)
Had the Trustee so much as picked up the phone, he also would have learned that Spehar
sued CMGT in California knowing CMGT could not afford to defend itself, and that he did so
because he disagreed with the unanimous decision of CMGT’s shareholders that it was time to
close CMGT’s business and to sell its assets to a new group of investors who were willing to risk
new capital. The Trustee also would have learned that, when they learned of Spehar’s lawsuit,
these new investors lost interest.
In short, the Default Judgment was entered because of a deliberate and rational business
decision by CMGT’s shareholders that it did not make economic sense to spend more money just
to fight Spehar over CMGT’s carcass. It was not entered due to professional malpractice. The

17

Trustee, with more than 25 years experience as a lawyer, did not lack the ability to ask basic
questions about the malpractice claims that he filed, he just chose not to do so.
Further, the Trustee’s declaration does contradict the record. For instance, the Trustee
claims that when Spehar brought a “complicated professional liability” claim to his attention, he
(the Trustee) retained “special counsel to investigate” it. (T.Resp. at 12-13 & Ex. A, ¶ 15.) As
just discussed, the claim was not complicated. Moreover, this Court already found that Spehar -and not the Trustee -- personally “hand-picked” the counsel to bring the malpractice claims, and
that Spehar thereafter directed the litigation. (Op. at 8, 19-20, 23-24.) The Court further found
that neither the Trustee nor his counsel discussed the malpractice case with any CMGT officers,
employees or shareholders. (Id. at 9.) Instead, the Court found that, on June 28, 2006 -- before
the suit was filed -- Spehar encouraged the Trustee to file the lawsuit without investigation, and
that the Trustee followed Spehar’s directive. (Id. at 11, 22.)
Indeed, the Trustee’s primary argument that he was not willful is premised on his
supposed complete ignorance of the facts and law regarding the malpractice claim, and his
complete reliance on Joyce to provide him with an independent analysis of the claim before
filing. Given that Joyce was selected and controlled by Spehar, and that the Trustee knew it,
there is no way to describe the Trustee’s claimed reliance as justified. Moreover, as the Court
found, Spehar told the Trustee in an email that Joyce did not perform an investigation before
filing, but the Trustee filed suit anyway. (Id. at 11.) All of this evidence shows that the Trustee
willfully and completely deserted his duties to the Court, the CMGT Bankruptcy estate and
Defendants in favor of Spehar, and then stuck his head in the sand so that if a day of reckoning
came -- i.e., today -- he could claim ignorance of any misconduct. Such willful blindness does
not excuse him from being punished personally. E.g., Aimster, 334 F.3d at 650.

18

E.

The Bankruptcy Court’s Approval Of Joyce’s
Retention Does Not Insulate The Trustee From Sanctions

The Trustee’s Response (at 13) notes that the Bankruptcy Court approved Joyce’s
retention, claiming that this insulates the Trustee from liability. (Citing In re Markos Gurnee
P’ship, 182 B.R. 211 (Bankr. N. D. Ill. 1995).) Yet, the reason Defendants seek sanctions is not
because the Trustee retained Joyce as his attorney. Rather, sanctions are sought because, among
other things, the Trustee failed to investigate and evaluate the spurious claims he filed, failed to
supervise Joyce, allowed one biased creditor to control the Trustee’s litigation for his own selfish
purposes and committed a fraud on the Court. In all events, an order approving trustee action
will insulate the trustee from liability only when the trustee provides a “full notice of all of the
relevant facts to the interested parties.” Markos, 182 B.R. at 219. Here, the Trustee did not tell
the Bankruptcy Court that he was going to use his retention of Joyce to bring frivolous claims
and violates his duties to the court system.
F.

The Trustee’s Later Dispute With Spehar Is Irrelevant

The Trustee points the Court to his subsequent dispute with Spehar, claiming that this
shows that he acted independently, stood up for CMGT’s unsecured creditors and was not
Spehar’s puppet. Of course, this is simply an attempt to contradict the Court’s finding that the
Trustee was Spehar’s puppet. (Op. at 24-25.) Moreover, because this dispute apparently arose
in 2008, it has no bearing on the fact that Spehar and the Trustee were in cahoots in 2006 when
the Trustee filed this suit. Indeed, the dispute had no effect on the Trustee’s later behavior in this
case. The Trustee pressed forward with his bogus claims even after his failed attempt to doublecross Spehar.
In reality, the Trustee’s dispute with Spehar exemplifies nothing more than a “falling out
among thieves.” When the Trustee was appointed, he promised Spehar that he would have a

19

security interest in the proceeds of this lawsuit, and made his intention perfectly clear in the
agreed financing order that he presented for the Bankruptcy Court to enter. See In re CMGT,
Inc., 424 B.R. 355, 357-59 (Bankr. N.D. Ill. 2010). In reliance on this agreed order, Spehar gave
the Trustee the funds needed to file this lawsuit. Id. Later, the Trustee reneged on his agreement
with Spehar and argued that, for technical reasons, he was not bound to the agreed order and,
instead, could treat Spehar as an unsecured creditor. Id. The Trustee almost got away with this
double-cross but, on appeal, Judge Gettleman compelled him to honor his agreement. Id. at 35960. Rather than a badge of honor, the whole episode illustrates the Trustee’s lack of integrity.
This story of the Trustee’s attempt to back out of his agreement with Spehar does not
vitiate this Court’s finding that the Trustee was Spehar’s puppet. At most, it shows that the
Trustee made a pact with Spehar to take his money to file this baseless claim, and then, after he
“accepted [Spehar’s] funds, the lawyering, and Spehar’s theory” (Op. at 20), the Trustee tried to
renege on the deal based on a technicality.
CONCLUSION
For the reasons stated herein and in the Opening Brief, Defendants respectfully request
that the Court grant their Motion for Sanctions against the Trustee, set the matter for a prove-up
of Defendants’ attorneys’ fees and costs incurred in defending this case, and grant Defendants
such other and further relief as is appropriate.
Respectfully submitted,
MAYER BROWN LLP and RONALD B. GIVEN

By:

/s/ Stephen Novack
One of Their Attorneys

20

CERTIFICATE OF SERVICE
Stephen Novack, an attorney, hereby certifies that he caused a true and correct copy of
the foregoing Defendants’ Reply in Support of Their Motion for Sanctions Against David
Grochocinski, Bankruptcy Trustee for CMGT, Inc. 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
David Edward Morgans
Myers & Miller, LLC
Thirty North LaSalle Street
Suite 2200
Chicago, Il 60602
and by Federal Express overnight service, upon the following:
Gerard Spehar
1625 Grandview Avenue
Glendale, CA 91201

on this 18th day of April, 2011.

By:

/s/ Stephen Novack