Sarno v. Akkeron

FIFTH DIVISION
FILED: 8/29/97

No. 1-96-2410

ANGELA SARNO and BETTER CARE, LTD., ) APPEAL FROM THE
) CIRCUIT COURT OF
Plaintiffs, ) COOK COUNTY
)
v. )
DR. ALFRED A. AKKERON, BROADWAY REAL ESTATE )
CORPORATION, BROADWAY ORTHOPEDIC, LTD., )
ALBERT L. GRASSO, PAUL THERMEN, LARRY BELLER )
and EVANS, MARSHALL, & PEASE, P.C., )
)
)
Defendants. )
_____________________________________________)
)
EVANS, MARSHALL, & PEASE, P.C., )
)
Counterplaintiff-Appellant, ) HONORABLE
) PATRICK E. McGANN
v. ) JUDGE PRESIDING.
)
ALBERT L. GRASSO, )
)
Counterdefendant-Appellee. )

JUSTICE HOFFMAN delivered the opinion of the court:
The plaintiffs, Angela Sarno and Better Care, Ltd., filed suit
against Dr. Alfred A. Akkeron and Evans, Marshall & Pease ("EMP"),
among others, alleging they conspired in the bad-faith filing of an
involuntary bankruptcy petition against Better Care. EMP
counterclaimed against its attorney, Albert Grasso, alleging that
Grasso engaged in legal malpractice by advising EMP to participate
in the involuntary bankruptcy petition. On motion by Grasso, the
trial court dismissed EMP's counterclaim under section 2-615 of the
Code of Civil Procedure ("Code")(735 ILCS 5/2-615(a)(4) (West
1994)), finding it barred by the bankruptcy court's decision. In
this appeal, EMP contends that (1) it was prejudiced by the
improper designation of Grasso's motion to dismiss as originating
under Code section 2-615, rather than section 2-619 (735 ILCS 5/2-
619 (West 1994)); (2) its counterclaim stated a cause of action for
legal malpractice; and (3) the court erred in finding that it was
precluded from asserting its legal malpractice claim under the
doctrines of collateral estoppel and unclean hands.
In March 1986, Sarno, an occupational therapist, and Akkeron,
an orthopedic specialist, formed a medical corporation known as
Better Care, Ltd., to provide physical and occupational therapy
services. Under their agreement, Akkeron was to refer patients to
the practice while Sarno provided the physical therapy services.
Akkeron also agreed to furnish the funds necessary to establish the
business. Better Care retained EMP, Akkeron's personal and
professional accounting firm, as the corporation's accountants, and
also engaged Grasso, Akkeron's personal attorney, to assist in the
process of incorporating Better Care and to serve as its counsel.
Late in 1986, it became necessary to restructure the business
relationship between Sarno and Akkeron, and in the ensuing months,
the two became embroiled in a bitter dispute over the control of
Better Care. The dispute was still unresolved in early 1988, when
EMP unexpectedly learned from Better Care's receptionist that it
had been terminated as Better Care's accountant. As of that time,
Better Care owed EMP $300 for its services for the most recent
quarter-year. Better Care also had accumulated some outstanding
debts to other creditors, including Akkeron and Broadway Land
Development Company ("Broadway"), a corporation solely-owned by
Akkeron which rented space to Better Care.
On February 22, 1988, Grasso filed a petition in bankruptcy
court on behalf of EMP, Akkeron, and Broadway, which sought to
impose involuntary bankruptcy upon Better Care. In a published
order dated March 1, 1989, the court dismissed the petition,
concluding that the petitioners had fallen short of satisfying the
requirements of the Bankruptcy Code for a declaration of bankruptcy
status. See 11 U.S.C. 303(b), (h)(1) (1988). The court found, in
relevant part, a complete lack of evidence that Better Care was not
paying debts as they became due within the meaning of section
303(h)(1). In re Better Care, Ltd., 97 B.R. 405, 407 (Bankr. N.D.
Ill. 1989); 11 U.S.C. 303(h)(1) (1988).
The court reserved jurisdiction to consider a petition filed
by Better Care and Sarno alleging that the petitioners had
initiated the bankruptcy proceedings in bad faith under section
303(i)(2) of the Bankruptcy Code (11 U.S.C. 303(i)(2) (1988)).
Following a hearing on July 14, 1988, the court determined that
each of the creditors had filed the petition for the sole purpose
of harassing Sarno and driving her and Better Care out of business.
The court also found that Grasso had provided the creditors with
incompetent representation regarding the petition. However,
regardless of this fact, the court ruled that each creditor had
formed its own antipathy towards Sarno and had decided to act upon
it "wholly independently from Grasso's advice." Accordingly, after
a third hearing in November of 1988, the court awarded Better Care,
inter alia, compensatory damages of $3,496.19, attorney fees of
$50,785.24, and punitive damages of $2,000 against EMP. In
addition, the court sanctioned Grasso and his law firm sua sponte
under Bankruptcy Rule 9011, for filing and pursuing the petition.
The court "strongly urge[d] the Grasso firm to invest in bankruptcy
education prior to embarking into bankruptcy matters in the
future."
On July 26, 1993, Sarno and Better Care filed their first
amended complaint for imposition of a constructive trust and other
relief, which gave rise to the counterclaim at issue. The
complaint alleged various acts undertaken, particularly by Akkeron,
which were part of a scheme designed to destroy Better Care and to
terminate Sarno's interest in the corporation. The complaint
further charged that EMP knowingly took part in this scheme by
joining in the filing of the bankruptcy petition.
EMP brought a two-count counterclaim charging Grasso with
legal malpractice, based both upon negligence and breach of
contract. According to the counterclaim, Grasso solicited EMP to
participate in the filing of the bankruptcy action, representing
that it was an appropriate means to collect the outstanding debt
that Better Care owed EMP. EMP alleged that Grasso failed to
indicate that the petition was without legal or factual basis, and
neglected to advise EMP regarding the risks associated with the
filing. EMP sought recovery of the actual and punitive damages it
was ordered to pay by the bankruptcy court, plus any damages and
attorney fees incurred as a result of Sarno and Better Care's
pending claim.
Grasso moved to dismiss the counterclaim under Code section 2-
615, advancing several arguments as to its legal insufficiency. In
his reply brief, Grasso raised an additional argument sounding in
collateral estoppel: that the bankruptcy court's determination of
bad faith precluded EMP from recovering any damages against Grasso
for legal malpractice.
Following a hearing, the transcript of which was omitted from
the record, the trial court dismissed EMP's counterclaim under
section 2-615. In written findings, the court concluded that EMP
was collaterally estopped from suing Grasso for malpractice by the
bankruptcy court's finding that it had filed the underlying action
in bad faith. As an alternative basis for dismissal, the court
found EMP's suit barred under the equitable doctrine of unclean
hands. The instant appeal followed.
On appeal, EMP contends that the court erred in finding that
the malpractice claim was barred by the bankruptcy court's decision
that the creditors had filed the bankruptcy case in bad faith.
Initially, however, EMP argues that Grasso engaged in improper
motion practice by asserting his collateral estoppel argument in
the context of a motion for judgment on the pleadings, rather than
in a motion to dismiss under Code section 2-619(a)(4). 735 ILCS
5/2-619(a)(4) (West 1994). EMP alleges that it was prejudiced by
the misdesignation, and that the trial court should not have
acquiesced in the practice.
Meticulous practice requires an attorney to specify whether
his motion to dismiss is brought under Code section 2-615 or 2-619.
Premier Electrical Construction Co. v. LaSalle National Bank, 115
Ill. App. 3d 638, 642, 450 N.E.2d 1360 (1983). A section 2-615
motion attacks only a complaint's legal sufficiency; its purpose is
not to raise affirmative factual defenses, but to allege defects
apparent on the face of the pleadings. Illinois Graphics Co. v.
Nickum, 159 Ill. 2d 469, 484, 639 N.E.2d 1282 (1994). Conversely,
the primary basis for a section 2-619 motion is to alert the court
to affirmative matter that defeats the claim or operates to avoid
its legal effect. 735 ILCS 5/2-619 (West 1994); Nickum, 159 Ill. 2d at 485. Because collateral estoppel operates to bar a legally
recognized claim, it is properly asserted in a motion under section
2-619. 735 ILCS 5/2-619(a)(4) (West 1994); see Nagy v. Beckley,
218 Ill. App. 3d 875, 883, 578 N.E.2d 1134 (1991); Smith v.
Chemical Personnel Search, Inc., 215 Ill. App. 3d 1078, 1081, 576 N.E.2d 340 (1991).
It has been held, however, that where an affirmative defense
is apparent from the face of the complaint, it is a proper subject
for a section 2-615 motion. See Summers v. Village of Durand, 267
Ill. App. 3d 767, 643 N.E.2d 272 (1994); Boonstra v. City of
Chicago, 214 Ill. App. 3d 379, 574 N.E.2d 689 (1991); Thomas v.
Petrulis, 125 Ill. App. 3d 415, 465 N.E.2d 1059 (1984). In such
cases, the motion must specifically point out the defect of which
the movant complains. See People ex rel. Casey v. Health &
Hospitals Governing Commission, 69 Ill. 2d 108, 113, 370 N.E.2d 499
(1977).
Grasso argues that dismissal of the counterclaim under section
2-615 was proper because the basis for his affirmative defense was
apparent from the face of the pleadings; specifically, Sarno had
incorporated the bankruptcy decision, including factual findings
barring the malpractice claim, into her complaint. We note that,
in addition to being incorporated into Sarno's complaint, the
bankruptcy decision was also pled in EMP's counterclaim: it formed
the basis of the malpractice action, and the counterclaim set forth
the bankruptcy hearing dates and generally described the court's
findings. This is sufficient under Supreme Court Rule 133 to
properly plead an underlying judgment. See 134 Ill. 2d R. 133(b).
Nonetheless, as we state below, we do not agree that the
defense of collateral estoppel was apparent from the face of the
pleadings in this case.
Collateral estoppel is an equitable doctrine, the application
of which is governed by principles of equity and fairness. Herzog
v. Lexington Township, 167 Ill. 2d 288, 294-95, 657 N.E.2d 926
(1995); LaHood v. Couri, 236 Ill. App. 3d 641, 646, 603 N.E.2d 1165
(1992). In order for the doctrine to apply, the party invoking it
must establish (1) that the issue decided in the prior adjudication
was identical to the one presented in the suit in question; (2)
that there was a final judgment on the merits in the prior
adjudication; (3) that the party against whom estoppel is asserted
was a party or in privity with a party to the prior adjudication;
and (4) that the factual issue against which the doctrine is
interposed has actually and necessarily been decided in the prior
action. Housing Authority for LaSalle County v. Young Men's
Christian Ass'n, 101 Ill. 2d 246, 252, 461 N.E.2d 959 (1984). The
party raising collateral estoppel bears the burden of showing with
clarity and certainty what was determined by the prior judgment.
LaHood, 236 Ill. App. 3d at 646; Benton v. Smith, 157 Ill. App. 3d
847, 510 N.E.2d 952 (1987).
Even if the above elements are found to be proven, collateral
estoppel will not be applied if unfairness or manifest injustice
would result. S & S Automotive v. Checker Taxi Co., 166 Ill. App.
3d 6, 10, 520 N.E.2d 929 (1988). Before applying the doctrine, the
court must ascertain that the party against whom it is asserted had
a full and fair opportunity as well as an incentive to litigate the
issue in the prior proceeding. Cleveringa v. J.I. Case Co., 230
Ill. App. 3d 831, 848, 595 N.E.2d 1193 (1992); see also Housing
Authority, 101 Ill. 2d 246.
The relevant findings of the bankruptcy court were as follows.
The court unequivocally concluded that Grasso had provided each of
the creditors with incompetent representation in the pursuit of the
bankruptcy action. The court noted, in particular, that Grasso
neglected to reasonably inquire into the existence of the elements
necessary for filing an involuntary petition. In re Better Care,
97 B.R. at 412.
Notwithstanding this, however, the court also found that the
creditors' conduct constituted bad faith under the "improper
purpose" test; that is, they were motivated purely by personal
malice or an intention to embarass or harass the debtor. In re
Better Care, 97 B.R. at 410. The court observed that Akkeron had
made futile attempts to wrest control of Better Care from Sarno,
and that he filed the bankruptcy petition because Sarno had failed
to capitulate to his demands. With regard to EMP, the court
concluded that, in addition to having a desire to go along with the
wishes of Akkeron, a valued client, EMP joined as a petitioning
creditor out of anger towards Sarno for terminating EMP's
accounting services.
The court noted that in certain cases, in the absence of
evidence of malice, reliance upon the advice of counsel in filing
a bankruptcy action could suffice to preclude a finding of bad
faith. In re Better Care, 97 B.R. at 412, citing In re Wavelength
Inc., 61 B.R. 614 (B.A.P. 9th Cir. 1986), and In re Advance Press
& Litho, Inc., 46 B.R. 700 (Bankr. D. Colo. 1984). However, it
went on to conclude that such a defense was not available in the
instant case. Each of the creditors wanted to destroy Sarno's
business, and filed the petition "wholly independently" of Grasso's
advice. In re Better Care, 97 B.R. at 412-13.
Applying the elements necessary for a finding of collateral
estoppel, we conclude that EMP lacked a full and fair opportunity
in the bankruptcy proceedings to adjudicate its claims against
Grasso. According to the counterclaim, Grasso solicited EMP's
participation in the filing, representing that it was an
appropriate means to collect the outstanding debt that Better Care
owed EMP. Grasso allegedly failed to inform EMP that the petition
was without legal or factual basis, and neglected to advise it
regarding the risks inherent in the filing.
Critically absent from the pleadings in this case is any
statement as to whether or not Grasso served as EMP's counsel
during the resolution of the bad faith issue. If, as EMP asserts
in its brief on appeal, Grasso was EMP's counsel, EMP clearly
lacked both the opportunity and the incentive to adjudicate its
claim against Grasso at that stage of the proceedings.
First, EMP lacked any incentive to assert a claim at that
point. Grasso appeared to be effectively representing its
interests when he took the stand in the bankruptcy proceedings and
admitted that the creditors filed the petition in reliance on his
advice.
At the same time, however, it was neither necessary nor in
Grasso's interest to expound upon his own negligence, or to provide
details regarding his representation of EMP in particular. There
appears to have been very little consideration by the bankruptcy
court regarding the content of Grasso's erroneous advice to EMP, or
the role that advice played in EMP's decision to participate in the
bankruptcy filing in the first instance. Indeed, the bankruptcy
opinion states that at the commencement of the bad-faith hearing,
the parties waived submission of any new evidence beyond that
presented on the petition itself. In re Better Care, 97 B.R. at
409. It wasn't until the November 1988 hearing on damages that the
creditors first submitted Grasso's testimony, which apparently
consisted of scarcely more than his statement that the petition was
filed "on his advice."
After considering the limited facts before us, we are unable
to conclude that the bankruptcy determination could equitably be
used as a bar to EMP's malpractice claim against Grasso. Grasso
was found to be inept in his representation of EMP in those
proceedings. Further, if Grasso in fact represented EMP at the
bad-faith hearing, he labored under a clear conflict of interest,
as the court's determination was contingent upon a finding of his
own negligence. As such, a factual issue remains with regard to
whether EMP had a full and fair opportunity to litigate the bad
faith issue before the bankruptcy court.
As an alternative basis for dismissal, the trial court found
that the bankruptcy decision operated to bar EMP's counterclaim
under the doctrine of unclean hands.
In Buttitta v. Newell, 176 Ill. App. 3d 880, 531 N.E.2d 957
(1988), and Makela v. Roach, 142 Ill. App. 3d 827, 492 N.E.2d 191
(1986), this court held that where a party voluntarily elects to
follow advice intended to extricate himself from a questionable
situation, he has unclean hands, and may not seek relief through a
subsequent malpractice action.
We find the situation at bar more readily analogous to the
case of Bucci v. Rustin, 227 Ill. App. 3d 779, 592 N.E.2d 297
(1992). In that malpractice case, the attorney failed to put on
any defense in the underlying action, and this resulted in his
client being found liable for fraud. In reversing the dismissal of
the client's malpractice claim, this court found the above rule
inapplicable, because the attorney's malpractice drew the
underlying determination itself into question.
Similarly, if Grasso represented EMP at the bad-faith hearing,
that hearing was rooted in a conflict of interest. We are unable
to state that EMP had a fair opportunity to defend itself against
the charge of bad faith, and thus cannot apply unclean hands in
this case.
EMP additionally argues that its counterclaim stated legally
sufficient claims against Grasso for legal malpractice. We decline
to address this issue, however, because it was never considered by
the trial court. Rather, the sole basis for the dismissal of EMP's
claim was the preclusive effect of the bankruptcy decision. Thus,
we reverse the dismissal, and remand the matter to the circuit
court for an initial determination as to the legal sufficiency of
the counterclaim.
For the foregoing reasons, the dismissal of EMP's counterclaim
is reversed and this case remanded for further proceedings.
Reversed and remanded.
HARTMAN, P.J., and HOURIHANE, J., concur.