David Grochocinski v. Mayer Brown Rowe & Maw, LLP ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 10-2057, 11-1393 & 11-3597
D AVID E. G ROCHOCINSKI, not individually,
but solely in his capacity as the Chapter 7 Trustee
for the bankruptcy estate of CMGT, INC.,
Plaintiff-Appellant/Cross-Appellee,
and
E DWARD T. JOYCE AND A SSOCIATES,
Cross-Appellee,
and
A PPEAL OF:
R. G ERARD S PEHAR, Movant,
Appellant,
v.
M AYER B ROWN R OWE & M AW, LLP, et al.,
Defendants-Appellees/Cross-Appellants.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:06-cv-05486—Virginia M. Kendall, Judge.
2 Nos. 10-2057, 11-1393 & 11-3597
A RGUED JANUARY 16, 2013—D ECIDED JUNE 21, 2013
Before B AUER and H AMILTON, Circuit Judges, and
M ILLER, District Judge. Œ
H AMILTON, Circuit Judge. The story of Rumpelstiltskin
is about turning straw into gold. The legal malpractice
case at the heart of these appeals presents a modern
attempt to turn metaphorical straw into real gold. The
district court rejected the effort, as do we.
This case originated in a contract dispute between
CMGT, Inc. and Spehar Capital, a company CMGT hired
to help it find financing. Spehar Capital sued CMGT over
a dispute related to this agreement and eventually pro-
cured a $17 million default judgment against CMGT,
which had no assets to pay it. Spehar Capital devised a
plan to recover on the judgment. Step one: force CMGT
into bankruptcy. Step two: convince the bankruptcy trustee
to bring a malpractice action against CMGT’s law firm
based on the theory that but for the law firm’s negligence,
Spehar Capital would never have obtained the default
judgment. Step three: win the malpractice action or force
a settlement for the nominal benefit of CMGT’s bank-
ruptcy estate. Step four: since Spehar Capital’s claim on
the bankruptcy estate dwarfs all others, Spehar Capital
Œ
The Honorable Robert L. Miller, Jr., of the Northern District
of Indiana, sitting by designation.
Nos. 10-2057, 11-1393 & 11-3597 3
receives the lion’s share of the payment to the bank-
ruptcy estate. Result: Spehar Capital receives payment
on the default judgment by convincing another court
that the default judgment should never have been en-
tered. A meritless default judgment would be trans-
formed into a significant payout. Straw turns into gold.
We are now at step two. The bankruptcy trustee sued
CMGT’s law firm, known as Mayer Brown, the de-
fendant here. The trustee claimed that Mayer Brown
committed malpractice by failing to advise CMGT on the
consequences of not settling its dispute with Spehar
Capital and by failing to defend CMGT against Spehar
Capital’s suit. Mayer Brown moved to dismiss, arguing
in part that this suit should be dismissed as a fraud on
the court due to the inconsistency between the theory of
the malpractice case and a recovery by Spehar Capital.
The district court denied the motion to dismiss but
granted discovery for the limited purpose of investigating
the fraud on the court theory. Mayer Brown then moved
for summary judgment, and the district court granted
the motion, reasoning that the doctrine of judicial
estoppel barred the inconsistencies in this suit, based on
undisputed facts. We agree. If the trustee were to prevail
in this suit, there would be a clear impression that one
court was misled. In the related appeals, we affirm the
denial of Gerard Spehar’s motion for intervention and
the denial of defendant Mayer Brown’s motion for sanc-
tions against plaintiff’s counsel and the trustee.
4 Nos. 10-2057, 11-1393 & 11-3597
I. Factual Background
A. CMGT
CMGT was formed in 1999 to provide management
services to the health care industry. CMGT owned soft-
ware that made it easier for companies to track em-
ployee absences. While CMGT appears to have had a
promising business idea, it lacked the start-up capital
needed to implement its plan on the desired scale.
CMGT agreed to have Ronald Given, a partner with
Mayer Brown, guide it through the process of obtaining
financing.1 The engagement letter provided that Mayer
Brown would provide services “in connection with
[CMGT’s] initial capitalization, formative acquisition
activities, and other related general corporate activities.”
In exchange, CMGT agreed to pay Mayer Brown 1.5 times
the firm’s normal hourly rates, but would owe nothing
unless and until CMGT secured over $1 million in fi-
nancing. Mayer Brown also retained the right to ter-
minate the agreement if unpaid legal fees exceeded
$50,000 or if CMGT did not secure financing by May 2000.
May 2000 came and went without financing, but Mayer
Brown continued to provide legal services with the
hope that financing would materialize.
In June 2001, CMGT also hired Spehar Capital to assist
in the search for investors. Spehar Capital pairs com-
1
Mayer Brown and Ronald Given are both defendants in this
action. Because the resolution of the issues in this appeal is
the same for both defendants, we refer to them collectively
as “Mayer Brown.”
Nos. 10-2057, 11-1393 & 11-3597 5
panies seeking investors with venture capitalists seeking
investments. For this service, Spehar Capital receives
a finder’s fee. Its founder is Gerard Spehar. The agree-
ment between CMGT and Spehar Capital, as amended
on September 30, 2002, provided that Spehar Capital
would receive a success fee “immediately at the suc-
cessful closing of a funding” with a firm introduced to
CMGT by Spehar Capital or with whom CMGT approved
Spehar Capital to hold discussions. The firms that met
these conditions were identified in an Exhibit A that
was attached to the contract and could be “amended only
by written addendum.” Upon the closing of such a deal,
CMGT was to pay Spehar Capital six percent of the
capital raised. Spehar Capital was also to receive six
percent of CMGT’s common stock “[a]t such time
as CMGT receives and accepts a Term Sheet or other
commitment from an investor(s) for a minimum of
$1,000,000,” and Spehar Capital was to have exclusive
investment banking rights. In addition, after the closing
of a successful financing transaction, Spehar Capital was
to receive a total of $100,000 in consulting fees spread
over twelve consecutive months.
B. The Trautner Deal
In 2003, CMGT still needed an investor. In July 2003, a
CMGT shareholder named Charles Trautner proposed
solving CMGT’s financial woes with what we will call
the “Trautner deal.” He proposed a spinoff transac-
tion in which his investment group would form a new
corporation that would purchase CMGT’s assets for either
6 Nos. 10-2057, 11-1393 & 11-3597
$500,000 or 20 percent of the new corporation’s stock. To
make the two options equivalent from the perspective
of CMGT’s shareholders, the new corporation would
receive an initial capitalization of at least $2.5 million.
CMGT’s president, Lou Franco, signed a non-binding
letter of intent with Trautner on August 1, 2003, and
CMGT’s shareholders then approved the deal on
August 22, 2003. The Trautner deal was scheduled to
close by September 30, 2003.
But a dispute with Spehar Capital derailed the Trautner
deal, and that dispute spawned the malpractice action
now before us. The Trautner deal did not provide for
any payment to Spehar Capital. CMGT, with the advice
of Mayer Brown, had concluded that the deal was
outside the scope of its contract with Spehar Capital.
According to CMGT, because the deal was arranged
through channels independent of Spehar Capital and
because Trautner was not included in Exhibit A, Spehar
Capital was not entitled to any payment. Spehar Capital,
however, maintained that it was entitled to payment.
Spehar Capital alleged that CMGT asked Spehar to par-
ticipate in conversations about the deal with Trautner
and that CMGT unreasonably refused to add Trautner
to the list on Exhibit A after Spehar Capital found out
about the proposed Trautner deal on August 8, 2003.
Over the next month, Spehar Capital and CMGT were
unable to reach any resolution, though the extent to
which they engaged in settlement negotiations is dis-
puted. Mayer Brown contends it is absurd to suggest
CMGT could settle because CMGT had no money with
Nos. 10-2057, 11-1393 & 11-3597 7
which to settle or even to defend the litigation. The
trustee contends that Spehar Capital wanted to settle
and that CMGT could have offered to settle with a per-
centage of future financing proceeds.
The trustee also contends that Mayer Brown negli-
gently failed to advise CMGT about the risk of not
settling for the future of CMGT. As an example of this
failure, the trustee points to an August 26, 2003 email
in which the president of CMGT, based on advice from
Mayer Brown, sent a letter to the shareholders conveying
confidence that “any claims against the transaction will
not succeed and, as a practical matter, the only substan-
tive effect we will be facing is additional documenta-
tion complexity and a delay in the winding up of
CMGT . . . .”
According to the trustee, Mayer Brown failed to
provide adequate advice to CMGT because the law firm
had negotiated a “functionally equivalent” deal with
Trautner that would have allowed Trautner essentially
to assume CMGT’s business without formally pur-
chasing CMGT’s assets from its shareholders. This alter-
native deal envisioned assigning CMGT’s existing con-
tracts to the new company formed by Trautner. CMGT
would pay the new company for servicing CMGT’s
contracts, including its accrued legal fees owed to
Mayer Brown, which would be paid on CMGT’s behalf.
In effect the deal would have given Trautner the benefit
of the Trautner deal and Mayer Brown would have re-
ceived payment of its fees without having to worry
about Spehar Capital’s claim. According to the trustee,
8 Nos. 10-2057, 11-1393 & 11-3597
however, this alternative deal was not in the interest
of CMGT or its shareholders because CMGT would lose
all of its revenue stream — the contracts that would
be serviced by the new corporation.
C. The California Suit
On September 9, 2003, Spehar Capital followed through
with its threat to sue, filing a complaint in a California
state court. We refer to this action as “the California
suit.” On September 12, the California court granted an
ex parte temporary restraining order enjoining CMGT
from closing the Trautner deal or any other deal whose
terms did not comply with the CMGT-Spehar Capital
agreement. Attorney Given of Mayer Brown forwarded
the order to CMGT’s president and shareholders. He
informed them of the order and reminded them that
Mayer Brown had not been retained to defend CMGT in
the California suit. Given later told the shareholders
that CMGT did not have money to contest the law-
suit and that CMGT could “no longer act on [the share-
holders’] behalf to protect [their] interests from Gerry
Spehar.” This email, however, also provided advice on
the merits of the California suit and invited CMGT’s
shareholders and chief operating officer to contact
Mayer Brown with any questions about the lawsuit. On
October 3, the temporary restraining order was con-
verted into a preliminary injunction. CMGT never ap-
peared to defend the suit, nor did any CMGT shareholder.
In November 2003, Spehar Capital amended its com-
plaint in the California suit to include a claim for dam-
Nos. 10-2057, 11-1393 & 11-3597 9
ages. CMGT still did not appear, and the California
court entered a default judgment in favor of Spehar
Capital for $17,045,780 on March 18, 2004. This repre-
sented legal expenses, the $150,000 success fee, and the
$100,000 management consulting fee that Spehar
Capital claimed it should receive if it assisted with the
successful closing of a financing deal. The vast bulk
of the judgment was based on supposed values of
$11,253,627 in stock compensation and $5,483,290 for
the lost exclusive investment banking rights. The values
of the stock compensation and investment banking
rights were calculated based on the projected value of
a speculative planned initial public offering in 2006 — a
figure Spehar obtained from CMGT’s promotional mate-
rials from several years earlier. At the prove-up hearing
in California, Spehar testified to all of these damages.
This state court judgment is not subject to collateral
attack in these proceedings. We are nevertheless troubled
by aspects of the judgment that are relevant to our
case. First, there was considerable tension between the
injunctive relief and the damage award. The damage
award rests on the premise that the Trautner deal
would have closed. Recall, though, that the same court’s
injunction — issued ex parte at Spehar Capital’s behest
on claims of irreparable harm — enjoined the closing of
the same Trautner deal, thus prohibiting CMGT from
receiving the very funding that Spehar Capital claimed
it had helped secure. Second, the valuation of the
stock options and the investment banking rights based
on a speculative IPO three years in the future is extra-
ordinary, to put it mildly. At the time Spehar Capital
10 Nos. 10-2057, 11-1393 & 11-3597
sought the default judgment, CMGT was valued in the
red. It had just agreed to a deal in which it would sell
its assets (without the liabilities) for a grand total of
just $500,000. Yet according to Spehar Capital and the
California court that entered the default judgment, the
real value of CMGT was more than $180 million. This
assumed that the tiny new company would have
enjoyed truly meteoric success. Perhaps this is why the
California judge said, upon entering the judgment, that
he doubted Spehar Capital would ever collect because
CMGT would “set [the Default Judgment] aside, walk
away from the company or they will go bankrupt.” In
other words, the judge who made the damages findings
did not expect the judgment would ever be collected.
The judge was right, but may have underestimated
Spehar Capital’s creativity. The last of his predictions
proved true. CMGT never paid the default judgment, and
Spehar Capital forced CMGT into bankruptcy, filing an
involuntary bankruptcy petition on August 25, 2004. On
September 21, 2004, David Grochocinski was appointed
to serve as the trustee. He did not move to vacate the
default judgment before the time to do so expired under
California law. This brings us to the present litigation.2
2
It is disputed whether the trustee could have successfully
vacated the default judgment. Under California law, a party
may move to vacate a default judgment within six months of
the entry of the judgment. Cal. Civ. Proc. Code § 473(b). The
motion must be accompanied by a copy of the proposed
answer. Relief from judgment is at the court’s discretion
(continued...)
Nos. 10-2057, 11-1393 & 11-3597 11
D. The Present Dispute
Shortly after Grochocinski was appointed trustee of
CMGT’s estate, Spehar Capital approached him about
bringing a malpractice action against CMGT’s attorneys,
Given and the Mayer Brown firm. The bankrupt CMGT
had essentially no assets, so Spehar Capital’s only hope
for recovering on the default judgment in the California
suit was to convince the trustee to sue CMGT’s lawyers
for malpractice. Since the CMGT estate had no money
to fund litigation, the trustee was unwilling to invest in
litigation on behalf of the no-asset estate that would
benefit only a single secured creditor — Spehar Capital.
The trustee nevertheless encouraged Spehar to hire
counsel to investigate whether a malpractice claim would
be viable.
Eventually, Spehar Capital and the trustee entered
into a post-petition financing agreement to help fund the
investigation into the malpractice action and to ensure
(...continued)
unless the application for relief is “accompanied by an at-
torney’s sworn affidavit attesting to his or her mistake, inad-
vertence, surprise, or neglect,” in which case the judg-
ment must be vacated. Id. Because the six-month period
had not run before the bankruptcy court issued the order of
relief on September 15, 2004, the trustee had until November 15,
2004 to move to vacate the judgment. 11 U.S.C. § 108(b). Ac-
cording to the trustee, he spent 30 minutes studying the Cali-
fornia statute after his appointment on September 21 and
concluded that it would not be feasible for the estate, which
had no assets at the time, to try to vacate the judgment.
12 Nos. 10-2057, 11-1393 & 11-3597
that CMGT’s unsecured creditors would receive a
fraction of any recovery. The agreement provided that
Spehar Capital would advance the estate $5,000 for the
costs of investigating the malpractice claim (an amount
that could be increased to $18,500). If the estate re-
covered on the claim, Spehar Capital would receive, de-
pending on the specific amount, approximately 80 to
90 percent of the net recovery after expenses (including
the attorney’s contingency fee).3 The agreement was
accepted by the bankruptcy court on September 2,
2005, and no creditors exercised their right to object
to its terms. After the agreement was made, Spehar
Capital filed a proof of claim for a secured amount of
$13,427,560 and an unsecured claim for $3,618,220.4
3
This recovery is less than Spehar Capital would be entitled
to under the bankruptcy code. At the time the agreement
was signed, it was unclear whether Spehar Capital was a
secured creditor or an unsecured creditor. To our knowledge
the estate has no other secured creditors. Therefore, if Spehar
Capital were a secured creditor, without the agreement,
Spehar Capital would receive full payment on its secured
claim before any of the other creditors would be compensated.
If Spehar Capital were an unsecured creditor, it would receive
approximately 90 percent of any recovery under a pro rata
distribution because its $17 million claim constitutes over
90 percent of the claims on the estate. In both scenarios,
Spehar Capital would receive less under the financing agree-
ment than it would have without the agreement.
4
The trustee challenged the secured claim on the ground
that Spehar Capital did not properly serve CMGT with a cita-
(continued...)
Nos. 10-2057, 11-1393 & 11-3597 13
Spehar Capital then recommended to the trustee a
lawyer specializing in malpractice who would handle
the case for a contingent fee. The trustee requested
CMGT’s case file from Mayer Brown and provided
it to Spehar Capital and its preferred lawyer for inves-
tigation. The proposed counsel declined to take the
case. Spehar Capital then recommended that the
trustee hire attorney Edward Joyce in his place, which
the trustee did. As the statute of limitations deadline
approached, Spehar Capital became increasingly anxious
about whether the suit would be filed. The trustee re-
sponded that he was leaving the decision to file or not
in Joyce’s hands.
4
(...continued)
tion to discover assets before filing the bankruptcy petition.
Before filing the bankruptcy petition, Spehar Capital acted
to ensure that it would have a secured claim against CMGT.
Spehar Capital domesticated the California judgment in
Illinois on March 31, 2004 and then filed a citation notice and a
notice to discover assets in Illinois court. Under Illinois law,
filing a citation enables a creditor to attach a secured lien to
the property of the debtor. Illinois, however, requires that the
citation be served on the debtor, and the bankruptcy judge
held that proper service did not occur here. In re CMGT, Inc.,
402 B.R. 262 (Bankr. N.D. Ill 2009). The district court re-
versed, reasoning that the post-petition financing order pre-
vented the trustee from arguing that Spehar Capital did not
have a secured claim. In re CMGT, 424 B.R. 355 (N.D. Ill. 2010).
14 Nos. 10-2057, 11-1393 & 11-3597
E. Procedural History
On August 23, 2005, the trustee, through counsel Joyce,
filed this action in Illinois state court. The complaint
contained two counts of malpractice that the trustee is
still pursuing. 5 Count I alleges that Mayer Brown negli-
gently advised CMGT with respect to the consequences
of Spehar Capital filing suit and that as a result, CMGT
was unable to close the Trautner deal or any other fi-
nancing deal. If CMGT had closed a deal, the trustee
alleges, it would have become a highly profitable com-
pany; instead, CMGT went bankrupt. Among other al-
leged failures, Mayer Brown supposedly failed to advise
CMGT “that a very probable consequence of a lawsuit
by [Spehar Capital], regardless of its merit, would be
that CMGT would not receive funding from any
source.” Count II alleges that Mayer Brown failed to
defend CMGT adequately (or failed to make clear that
it would not defend CMGT) against Spehar Capital’s
lawsuit and that as a result, CMGT sustained damages in
the amount of the $17 million default judgment. Mayer
Brown promptly removed to federal court under the
bankruptcy removal statute, 28 U.S.C. § 1452, and the
district court properly exercised jurisdiction because this
dispute is “related to” a bankruptcy proceeding. (Any
money recovered from Mayer Brown will increase
the value of the bankruptcy estate.) See 28 U.S.C. § 1334(b);
Black v. USPS (In re Heath), 115 F.3d 521, 524 (7th Cir.
5
The original complaint alleged four counts of malpractice.
Counts III and IV have been dismissed voluntarily.
Nos. 10-2057, 11-1393 & 11-3597 15
1997) (proceeding is related to a bankruptcy when it is
“likely to affect the debtor’s estate”).
Mayer Brown next moved to dismiss this unusual
case, both for failure to state a claim and under the
theory that the case was brought with “unclean hands” as
part of a fraud on the court system orchestrated by
Spehar Capital to secure a bogus default judgment and
then collect it in bankruptcy through a meritless mal-
practice action. The district court denied the majority
of Mayer Brown’s motion. The court was initially not
convinced by the fraud on the court theory because the
trustee — not Spehar Capital — had brought the mal-
practice action, and because Mayer Brown did not
present clear evidence that the trustee had perpetrated
any fraud on the judicial system. Grochocinski v. Mayer
Brown Rowe & Maw LLP, No. 06 C 5486, 2007 WL 1875995,
at *3-4 (N.D. Ill. June 28, 2007). The court also found
that the trustee pled a sufficient claim for malpractice
under Count II and much of Count I.6
6
Specifically, the court rejected Mayer Brown’s arguments
that the trustee’s failure to vacate the $17 million default
judgment necessarily made the trustee, at least as a matter of
law, the proximate cause of the loss and that the $17 million
default judgment could not constitute damages for malpractice
under Illinois law because it had never been paid. Grochocinski
v. Mayer Brown Rowe & Maw LLP, No. 06 C 5486, 2007 WL
1875995, *7-12 (N.D. Ill. June 28, 2007). The court also found
that the language of Mayer Brown’s engagement letter did
not foreclose as a matter of law the possible existence of a duty
(continued...)
16 Nos. 10-2057, 11-1393 & 11-3597
Mayer Brown moved to reconsider. The court denied
the motion but noted that it now found the “unclean
hands” theory “very persuasive” and opened discovery
for the limited purpose of investigating the issue.
Grochocinski v. Mayer Brown Rowe & Maw LLP, No. 06 C
5486, 2010 WL 1407256, at *8 (N.D. Ill. Mar. 31, 2010).
After discovery, Mayer Brown moved for summary
judgment on its unclean hands theory, arguing that it
would be absurd for Spehar Capital to receive the lion’s
share of any recovery when proving the causation ele-
ment of malpractice would require the trustee to prove
that Spehar Capital had never been entitled to prevail
in the California suit.
The district court granted summary judgment in favor
of Mayer Brown. The district court did not apply the
doctrine of unclean hands but instead relied on the doc-
trine of judicial estoppel, holding that it prevented the
trustee from taking a position in this lawsuit incon-
sistent with Spehar Capital’s position in the California
suit. Acknowledging that the parties to this suit are
different from the California suit, the district court
found this was not a per se bar because judicial estoppel
is “concerned solely with protecting the integrity of the
6
(...continued)
of care to CMGT and that several other alleged acts of mal-
practice could be actionable. We do not address any of those
issues here. The district court also found, though, that Mayer
Brown could not be liable for failure to advise that Spehar
Capital would sue or for failure to provide legal advice
to CMGT’s shareholders. Id. at *8-9.
Nos. 10-2057, 11-1393 & 11-3597 17
courts, not the relationship between the parties to the
prior litigation.” Id. at *10. The court found it appropriate
to bind the trustee to Spehar Capital’s prior conduct
because the trustee “acted at all times as a proxy for the
real party in this case, SC.” Id., citing Taylor v. Sturgell,
553 U.S. 880 (2008) (recognizing exception to rule
against non-party preclusion for relitigation through
proxy). The court then found that Spehar Capital’s judg-
ment in the California suit was inconsistent with the
trustee’s need to prove in the malpractice suit that
Spehar Capital was never entitled to the judgment in
the first place and that without this argument, the mal-
practice action failed as a matter of law. In two later
proceedings, the district court denied Gerard Spehar’s
post-judgment motion to intervene and denied nearly
all of Mayer Brown’s motion for sanctions against the
trustee and his lawyer Joyce. The trustee, Spehar, and
Mayer Brown have all appealed. The appeals were con-
solidated and we have jurisdiction over each as an
appeal from a final judgment pursuant to 28 U.S.C. § 1291.
II. Summary Judgment in Favor of Mayer Brown
Summary judgment is appropriate if there are no
genuine issues of material fact such that the moving
party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(a). We review the district court’s grant of
summary judgment de novo, giving the non-moving party
the benefit of conflicts in the evidence and reasonable
inferences that could be drawn from it. See Good v. Univ.
of Chicago Med. Ctr., 673 F.3d 670, 673 (7th Cir. 2012). We
18 Nos. 10-2057, 11-1393 & 11-3597
may affirm the grant of summary judgment on “any
alternative basis found in the record as long as that
basis was adequately considered by the district court
and the nonmoving party had an opportunity to con-
test it.” Best v. City of Portland, 554 F.3d 698, 702 (7th
Cir. 2009). On appeal, the trustee argues that the district
court erred in applying judicial estoppel by attributing
to the estate Spehar Capital’s previous litigation con-
duct. We find no fault with the application of judicial
estoppel in this case.
Judicial estoppel is a flexible equitable doctrine de-
signed to prevent “the perversion of the judicial pro-
cess.” In re Cassidy, 892 F.2d 637, 641 (7th Cir. 1990). The
doctrine protects the courts from being “ ‘manipulated
by chameleonic litigants who seek to prevail, twice, on
opposite theories.’ ” Ogden Martin Systems of Indianapolis,
Inc. v. Whiting Corp., 179 F.3d 523, 527 (7th Cir. 1999)
(quotations omitted); Ladd v. ITT Corp., 148 F.3d 753, 756
(7th Cir. 1998) (“the purpose of the doctrine . . . is to
reduce fraud in the legal process by forcing a modicum
of consistency on a repeating litigant”). It may be raised
by any party, regardless of whether the party was preju-
diced by the inconsistency, or by the court on its own
motion. See In re Cassidy, 892 F.2d at 641. Because the
doctrine is a “matter of equitable judgment and discre-
tion,” we review a district court’s application of the
doctrine for an abuse of that discretion. In re Knight-
Celotex, LLC, 695 F.3d 714, 721 (7th Cir. 2012).
The application of judicial estoppel is “not reducible
to any general formulation of principle,” though the
Nos. 10-2057, 11-1393 & 11-3597 19
inquiry is typically informed by several factors. New
Hampshire v. Maine, 532 U.S. 742, 750 (2001) (quotation
omitted). The Supreme Court has identified three con-
siderations to help guide the inquiry: (1) whether “a
party’s later position must be clearly inconsistent with
its earlier position;” (2) whether “the party has suc-
ceeded in persuading a court to accept that party’s
earlier position, so that judicial acceptance of an incon-
sistent position in a later proceeding would create
the perception that either the first or second court was
misled;” and (3) whether “the party seeking to assert
an inconsistent position would derive an unfair ad-
vantage or impose an unfair detriment on the opposing
party if not estopped.” Id. at 750-51 (quotations omitted).
We have emphasized that these are not rigid require-
ments but “general guideposts that must be considered
in the context of all the relevant equities in any given
case.” In re Knight-Celotex, LLC, 695 F.3d at 722.
The trustee bases his appeal on a question of first im-
pression: What showing is required to apply judicial
estoppel to a litigant based on the litigation positions
of someone else? 7 The trustee argues that the district
court erred in applying judicial estoppel by attributing
to the estate Spehar Capital’s previous litigation posi-
tions. According to the trustee, estoppel based in part on
7
The trustee has not objected to the applicability of any of the
other judicial estoppel factors, so we consider any such argu-
ments waived. See Carroll v. Lynch, 698 F.3d 561, 567-68 (7th
Cir. 2012).
20 Nos. 10-2057, 11-1393 & 11-3597
the conduct of a non-party must comport with the ex-
ceptions to non-party preclusion identified in Taylor v.
Sturgell, 553 U.S. 880 (2008), and the district court erred
in concluding that one of these limited exceptions was
met, at least as a matter of law on summary judgment.
Mayer Brown responds that judicial estoppel is more
flexible than the preclusion doctrines and can be
applied regardless of whether the case meets an excep-
tion identified in Taylor.8
We agree with Mayer Brown that the applicability of
judicial estoppel is not limited to the exceptions for
8
Taylor addressed whether the doctrines of claim and issue
preclusion could bind a non-party to a judgment in an
identical suit if the non-party was “virtually represented” by a
party. The government asked the Supreme Court to adopt
a “heavily fact-driven” and “equitable” approach to non-party
claim and issue preclusion through which a court would
make a “close enough” determination of whether a non-party
should be precluded. Taylor, 553 U.S. at 898-99. The Supreme
Court concluded that such a “diffuse balancing” approach
did not provide sufficient respect for the fundamental nature
of the general rule that “ ‘one is not bound by a judgment in
personam in a litigation in which he is not designated as a
party or to which he has not been made a party by service of
process.’ ” Id. at 893, quoting Hansberry v. Lee, 311 U.S. 32,
40 (1940). The Court concluded that only discrete, clearly
delineated exceptions are consistent with the fundamental
guarantee to one’s own day in court. Because we find Taylor
inapplicable to this case, we express no view on whether the
facts of this case fall within one of the discrete exceptions
recognized in Taylor.
Nos. 10-2057, 11-1393 & 11-3597 21
claim and issue preclusion identified in Taylor. Judicial
estoppel is more flexible than the claim and issue pre-
clusion doctrines that were the concern in Taylor. It is
true that both the preclusion doctrines and judicial
estoppel attempt to ensure consistent results across
proceedings. E.g., Montana v. United States, 440 U.S. 147,
154 (1979) (noting that claim preclusion “fosters reliance
on judicial action by minimizing the possibility of incon-
sistent decisions”). But judicial estoppel is concerned
more generally with protecting the integrity of the
courts from the appearance and reality of manipulative
litigation conduct. See New Hampshire, 532 U.S. at 749-50(collecting cases that “have uniformly recognized that
[the doctrine’s] purpose is to protect the integrity of the
judicial process”) (quotations omitted). Judicial estoppel
is a flexible equitable doctrine that is not “reducible to
any general formulation of principle” and accordingly
does not lend itself to rigid rules. Id. at 750. To protect
the integrity of the judicial process, a court needs
freedom to consider the equities of an entire case. There-
fore it is appropriate for a court considering judicial
estoppel effects of a non-party’s conduct to engage in
an equitable inquiry that turns on the specific circum-
stances of an individual case. With this in mind, we
turn to the equities of this case.
The district court concluded that the unusual circum-
stances of this case made it equitable to treat the trustee
and Spehar Capital as the same entity so that positions
taken by Spehar Capital in the California suit would be
attributed to the trustee for purposes of judicial estoppel.
The court pointed to a wealth of undisputed evidence
22 Nos. 10-2057, 11-1393 & 11-3597
demonstrating the appropriateness of treating Spehar
Capital and the trustee as one and the same for this
purpose. Spehar Capital was instrumental in or-
chestrating both the bankruptcy and the filing of this
suit. Spehar Capital forced CMGT into bankruptcy for
the purpose of convincing the trustee to bring a mal-
practice action against CMGT’s counsel. Once CMGT was
in bankruptcy, Spehar Capital approached the trustee
about bringing this suit. When the trustee was
reluctant, Spehar Capital agreed to lend the trustee
money to investigate the possible claim and to carve out
a small portion of any recovery for the benefit of the
unsecured creditors. Spehar Capital then recommended
the attorney to bring the suit and frequently com-
municated with the attorney. And of course, Spehar
Capital was set to receive the lion’s share of any recov-
ery. Together, all of these undisputed facts convinced
the district court that it was appropriate to hold the
trustee accountable for the positions taken by Spehar
Capital in the California suit. Grochocinski, 2010 WL
1407256, at *14. Once Spehar Capital’s conduct was con-
sidered, the district judge concluded that it would
be inconsistent for the trustee to prevail in the
malpractice case, for the benefit of Spehar Capital, on
the theory that Spehar Capital never should have
obtained the judgment in the California suit. And
without this argument, the court concluded, the mal-
practice action failed as a matter of law.
Based on the undisputed facts, the district court
did not abuse its discretion in reaching this conclusion
as a matter of its equitable judgment. This is not merely
Nos. 10-2057, 11-1393 & 11-3597 23
a case where the creditor of an estate previously took a
litigation position inconsistent with a position taken
by the trustee. Rather, Spehar Capital was intimately
involved in the genesis and the hoped-for end of this
suit. Spehar Capital forced CMGT into bankruptcy for
the purpose of allowing this suit to be brought and,
after filing the bankruptcy petition, worked tirelessly
to convince the trustee to bring suit. Given Spehar
Capital’s significant involvement in this case, if the
trustee were to prevail in this suit and Spehar Capital
were to receive the lion’s share of the recovery, the
courts would have been abused and misled. Preventing
such a reality and perception is a core purpose of judicial
estoppel. The district court’s opinion clearly showed
Spehar Capital’s intimate involvement in this case and
how this involvement created the impression that the
courts were being misused. The consideration of Spehar
Capital’s previous litigation was consistent with the
aims of judicial estoppel, and the district court did not
abuse its discretion by attributing Spehar Capital’s liti-
gation conduct to the trustee.
The trustee also argues that judicial estoppel is inequi-
table here because it will unfairly prevent the innocent
unsecured creditors from receiving any recovery. In
other circumstances, this could be a serious concern, but
it does not sway the equities in this case. Had it not
been for Spehar Capital’s insistence, this suit never
would have been brought. Before Spehar contacted the
trustee about bringing this action, the trustee was pre-
pared to terminate the bankruptcy as a no-asset estate.
If the trustee had followed that course, the unsecured
24 Nos. 10-2057, 11-1393 & 11-3597
creditors would have received no recovery as well. Since
this suit would not have been brought but for Spehar
Capital and the bulk of any recovery would wind up
in its pockets, it was not an abuse of discretion to
conclude that foreclosing the unsecured creditors’
recovery did not tip the scales against the use of judicial
estoppel. We affirm the grant of summary judgment
in favor of Mayer Brown.
III. Intervention
Also before this court is Gerard Spehar’s appeal of
the denial of his motion to intervene pursuant to
Federal Rule of Civil Procedure 24. Mr. Spehar argues
that he should be allowed to intervene both as of right
and permissively because his professional reputation
and ability to earn a living were placed at issue in this
suit when the district court concluded that he had or-
chestrated an attempted fraud on the court. Mr. Spehar
moved to intervene on April 28, 2010, nearly one
month after the district court granted summary judg-
ment in favor of Mayer Brown and over two and a
half years after the court granted discovery on the de-
fendants’ fraud on the court theory. The district court
denied the motion to intervene as untimely. Grochocinski
v. Mayer Brown Rowe & Maw LLP, No. 06 C 5486, 2011
WL 382737 (N.D. Ill. Feb. 3, 2011). We review the
denial of a motion for intervention as untimely for
abuse of discretion. B.H. v. McDonald, 49 F.3d 294,
297 (7th Cir. 1995). We find no merit in the appeal
and affirm.
Nos. 10-2057, 11-1393 & 11-3597 25
Rule 24 provides two avenues for intervention, either
of which must be pursued by a timely motion. See Heart-
wood, Inc. v. U.S. Forest Serv., 316 F.3d 694, 701 (7th
Cir. 2003). The timeliness requirement forces interested
non-parties to seek to intervene promptly so as not to
upset the progress made toward resolving a dispute.
We look to four factors to determine whether a motion is
timely: “(1) the length of time the intervenor knew or
should have known of his interest in the case; (2) the
prejudice caused to the original parties by the delay; (3) the
prejudice to the intervenor if the motion is denied;
(4) any other unusual circumstances.” Sokaogon Chippewa
Cmty. v. Babbitt, 214 F.3d 941, 949 (7th Cir. 2000).9
The district court found that each of the four factors
weighed against the timeliness of Spehar’s motion. First,
the court concluded that Spehar should have known
that his personal and professional interests may have
been affected by this suit on October 30, 2007 when the
court granted discovery on the “unclean hands” defense.
The court noted that Spehar was actually aware of the
9
A court must permit a non-party to intervene as of right if
he “claims an interest relating to the property or transaction
that is the subject of the action, and is so situated that
disposing of the action may as a practical matter impair or
impede the movant’s ability to protect its interest, unless
existing parties adequately represent that interest.” Fed. R.
Civ. P. Rule 24(a)(2). If a person cannot intervene as of right,
a court may permit him to intervene if he “has a claim or
defense that shares with the main action a common question
of law or fact.” Fed. R. Civ. P. 24(b)(1)(B).
26 Nos. 10-2057, 11-1393 & 11-3597
issue because he notified the CFA Institute of the allega-
tions against him in the suit, yet he did not move to
intervene until April 28, 2010, after the district court
had already granted summary judgment. Second, al-
lowing intervention would have prejudiced Mayer
Brown because it would have caused additional delay
in resolving this case, which had reached a final judg-
ment. Third, the court found that Spehar would not be
significantly prejudiced because he was heavily in-
volved in the lawsuit behind the scenes, and the trustee
had adequately rebutted the personal attacks Mayer
Brown had made against Spehar. Fourth, there were no
other unusual circumstances justifying intervention.
Spehar raises a number of frail arguments challenging
the district court’s ruling. First, he argues that allowing
intervention and vacating the final judgment would
cause no prejudice to Mayer Brown because no merits
discovery has occurred in the case. This argument
ignores the costs Mayer Brown had already incurred
investigating and briefing the issues in the district court
before the motion to intervene. Second, Spehar argues
that he first learned that his professional reputation
was at issue in this case when the district court
granted summary judgment on March 31, 2010. He
claims that the “unclean hands” defense referred only to
the conduct of the trustee. This is simply not true. In
its opinion denying Mayer Brown’s motion to dismiss
issued on June 28, 2007, the court made clear that the
“unclean hands” argument focused on Mr. Spehar. The
court found that the “most obvious problem with the
Lawyer Defendant’s argument is that Spehar — which
Nos. 10-2057, 11-1393 & 11-3597 27
is not a party to this action — is the entity that had al-
legedly orchestrated a ‘fraud on the judicial system.’ ”
Grochocinski v. Mayer Brown Rowe & Maw LLP, No. 06 C
5486, 2007 WL 1875995, at *4 (N.D. Ill. June 28, 2007).
When the court granted discovery on this defense on
October 30, 2007, Spehar could have missed the implica-
tions for his reputation only if he was willfully blind to
them. Third, Spehar argues that the district court dis-
counted the severe prejudice he will suffer from the
denial of intervention because the court’s findings have
left him “effectively unemployable.” Although we are
skeptical that this prejudice is “an interest relating to
the property or transaction that is the subject of the
action,” even if it were, the district court acted well within
its discretion to conclude that the motion for interven-
tion — filed two and a half years after Spehar knew his
reputation may be at issue in the case — was untimely.1 0
10
We affirm the denial of intervention as untimely without
reaching an obvious and much more fundamental issue:
whether the reputational interests of a witness in case can
support the witness’ intervention in the case as a party. Judges
and juries must often evaluate the conduct and credibility
of people and institutions that are not parties. Judges’ findings
and comments are often critical of non-parties, not gratui-
tously but as a necessary part of deciding the cases properly
before them. To hold that the prospect of a judge’s adverse
finding or comment could support intervention as a party,
with rights to appeal, for example, even if the original parties
are satisfied with the outcome, would amount to a stunning
expansion of standing and would invite prolonged and
even endless litigation.
28 Nos. 10-2057, 11-1393 & 11-3597
IV. Cross-appeal on Sanctions
We turn now to Mayer Brown’s cross-appeal of the
denial of its motions for sanctions against the trustee
and attorney Joyce for prosecuting a frivolous and fraud-
ulent claim. Mayer Brown sought sanctions in the dis-
trict court against both under the court’s inherent
authority and against Joyce under 28 U.S.C. § 1927, as well.
The federal courts have the inherent power to impose
a wide range of sanctions upon parties for abusive litiga-
tion. This inherent power, however, is limited to “cases
in which a litigant has engaged in bad-faith conduct or
willful disobedience of a court’s orders.” Chambers v.
NASCO, Inc., 501 U.S. 32, 47 (1991); see also Mach v. Will
County Sheriff, 580 F.3d 495, 501 (7th Cir. 2009). There is
no single litmus test for determining what constitutes
bad faith, though more than mere negligence is required.
See Maynard v. Nygren, 332 F.3d 462, 471 (7th Cir. 2003)
(noting court has “no authority under the Rules or
under the inherent powers of the court to sanction attor-
neys for mere negligence”). Sanctions against counsel
under 28 U.S.C. § 1927 are appropriate when “counsel
acted recklessly, counsel raised baseless claims despite
notice of the frivolous nature of these claims, or counsel
otherwise showed indifference to statutes, rules, or court
orders.” Kotsilieris v. Chalmers, 966 F.2d 1181, 1184-85
(7th Cir. 1992).
The district court found that the trustee was negli-
gent in entrusting the case to Joyce without actively moni-
toring the litigation but that sanctions were not ap-
propriate because his conduct was not more than “mere
Nos. 10-2057, 11-1393 & 11-3597 29
negligence.” Grochocinski v. Mayer Brown Rowe & Maw
LLP, 452 B.R. 676, 683 (N.D. Ill. 2011). The court also
concluded that sanctions were not appropriate for
Joyce because his arguments against the fraud on the
court defense “were not frivolous.” Id. at 685. We
review the denial of sanctions for abuse of discretion.
Dal Pozzo v. Basic Mach. Co., 463 F.3d 609, 614 (7th Cir.
2006). We conclude that the district court did not
abuse its discretion.
A. Trustee Grochocinski
The district court concluded that sanctions against
the trustee were unwarranted because he was not more
than negligent. In support of this conclusion, the court
focused on the fact that the trustee had no professional
experience with legal malpractice claims and relied on
his special counsel to prosecute the case. According to
the court, the trustee’s reliance on special counsel with-
out significant oversight was negligent but not worse.
Grochocinski, 452 B.R. at 684 (citing 11 U.S.C. § 327(a),
which “specifically provides for the employment of
special counsel”). Mayer Brown argues that this con-
clusion was an abuse of discretion both because the
district court applied the incorrect law and because the
factual conclusion was unreasonable. We disagree.
First, Mayer Brown contends the district court erred
by employing the more forgiving “willful and deliberate”
standard to the trustee’s conduct. It is well established
that a bankruptcy trustee may not be held personally
30 Nos. 10-2057, 11-1393 & 11-3597
liable for a breach of her fiduciary duties unless the
breach was “willful and deliberate . . . .” In re Chicago
Pacific Corp., 773 F.2d 909, 915 (7th Cir. 1985). Mayer
Brown argues that it was error to apply this standard
because the willful and deliberate standard should
govern only motions for sanctions for breaches of a
trustee’s fiduciary duties, not sanctions for litigation con-
duct. This distinction makes intuitive sense, but we
need not determine whether bankruptcy trustees are
always subject to the willful and deliberate standard
because the choice of standard is not decisive in this
case. The choice of standard did not affect the outcome
of the sanctions motion because the district judge con-
cluded that the trustee was not more than negligent,
and negligence alone is not a sufficient basis for
issuing sanctions under the court’s inherent authority.
See Maynard, 332 F.3d at 471.
Second, Mayer Brown argues that it was unreasonable
for the court to conclude that the trustee’s behavior
was not more than negligent while at the same time
dismissing the suit as a fraud on the court. Mayer Brown
contends that the trustee was more than negligent in
allowing this case to be filed because he knew that
Spehar Capital’s default judgment was unfounded and
that the suit was a vehicle for Spehar Capital to collect on
the judgment. Moreover, the trustee failed to conduct
an independent investigation into the underlying facts
of the case and instead was content to rely on Spehar’s
representations. Thus, he “willingly allowed his office
to become the vehicle for the fraud.”
Nos. 10-2057, 11-1393 & 11-3597 31
While these arguments have considerable force
and could have persuaded another judge to impose
sanctions, abuse of discretion is a deferential standard
that permits different courts to reach different results so
long as the results are within the bounds of reason. The
flexibility we afford district judges on matters within
their discretion reflects the idea that their firsthand
familiarity with a case makes them better situated to
resolve issues committed to their discretion. An “abuse
occurs only when a court has acted contrary to the law
or reached an unreasonable result.” Sokolik v. Milwaukee
Sch. of Eng’g (In re Sokolik), 635 F.3d 261, 269 (7th Cir. 2011).
Here we cannot say that the district court’s decision
not to award sanctions was unreasonable. This is not a
case in which the district judge failed to appreciate the
gravity of the conduct. To the contrary, the district
judge was obviously troubled by this case. The court’s
opinions issued throughout this litigation did not hold
back in criticizing Spehar, Joyce, and the trustee, yet
despite this clear recognition of troublesome conduct,
the district judge concluded that sanctions were inap-
propriate. Members of this panel might have come to a
different conclusion, but given the thoroughness of the
district court’s analysis and its clear recognition of the
gravity of the alleged misconduct, we cannot say that the
decision to deny sanctions against the trustee was unrea-
sonable.
B. Attorney Joyce
The district court also concluded that sanctions were
unwarranted against attorney Joyce under the court’s
32 Nos. 10-2057, 11-1393 & 11-3597
inherent authority and 28 U.S.C. § 1927. The court found
that sanctions were inappropriate because the mal-
practice claims in the complaint were not unfounded
and Joyce did not unreasonably prolong the pro-
ceedings in contesting the “unclean hands” defense.
Mayer Brown argues that this was error, raising objec-
tions similar to those regarding the denial of sanctions
against the trustee.1 1
Mayer Brown contends that the district court erred in
its conclusion that attorney Joyce did not persist in
making frivolous claims to the court after Mayer Brown
first raised its fraud on the court defense. According
to Mayer Brown, the motion to dismiss put Joyce on
notice of the problems with the suit, and he should
have dismissed the case voluntarily. The district court,
however, found that Joyce’s responses to Mayer Brown’s
motions to dismiss and for summary judgment con-
tained arguments that were not frivolous. The court
recognized that the fraud on the court defense was
novel and that Joyce had a reasonable argument that jud-
icial estoppel should not apply in this case. Grochocinski,
452 B.R. at 685-86. While it would have been preferable
if Joyce had decided not to bring this case at all, the
district court did not act unreasonably in concluding that
he did not make frivolous claims before the court. The
11
The district court concluded the same reasons that
weighed against sanctions under section 1927 applied to the
court’s inherent authority. For simplicity, we address the
issues together.
Nos. 10-2057, 11-1393 & 11-3597 33
applicability of judicial estoppel (and Mayer Brown’s
other defenses) to this case was not clearly established
before Joyce brought suit, and there were reasonable
but ultimately unpersuasive grounds for arguing that
the estate should not be held to account for Spehar Capi-
tal’s inconsistent conduct. We have rejected those argu-
ments on the merits, but the district court did not abuse
its discretion in denying sanctions under section 1927
or under the court’s inherent authority.
V. Conclusion
We hope this peculiar and misguided case has reached
its end. We A FFIRM the grant of summary judgment
in favor of the defendants. We also A FFIRM the denial
of Mr. Spehar’s motion to intervene and the denial of
sanctions against the trustee and attorney Joyce.
6-21-13