Goldfine v. Barack, Ferrazzano, Kirschbaum & Perlman

2014 IL 116362IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 116362)
MORTON S. GOLDFINE et al., Appellees, v. BARACK, FERRAZZANO,
KIRSCHBAUM & PERLMAN et al., Appellants.
Opinion filed October 2, 2014.
JUSTICE KILBRIDE delivered the judgment of the court, with opinion.
Chief Justice Garman and Justices Freeman, Thomas, Karmeier, Burke, and Theis
concurred in the judgment and opinion.
OPINION
¶1 At issue in this appeal is the application of the civil remedies provisions of section
13(A) of the Illinois Securities Law of 1953 (Illinois Securities Law) (815 ILCS 5/1 et
seq. (West 2010)) in calculating damages in a legal malpractice action.
¶2 Plaintiffs, Morton and Adrienne Goldfine, brought a legal malpractice action
against defendant law firm, Barack, Ferrazzano, Kirschbaum & Perlman, and several
of the firm’s partners, to recover damages as a result of defendants’ failure to preserve
their Illinois Securities Law cause of action against an investment firm.
¶3 The circuit court of Cook County ruled in plaintiffs’ favor and awarded damages
for plaintiffs’ Illinois Securities Law claim losses. The appellate court affirmed the trial
court’s findings in favor of plaintiffs. However, the appellate court determined that the
trial court failed to apply the correct mathematical formula to calculate plaintiffs’
Illinois Securities Law claim damages. The appellate court also determined the trial
court’s attorney fee award was based on its incorrect damage calculation. Accordingly,
the appellate court reversed the trial court’s award of damages and attorney fees and
remanded the case to the trial court for a recalculation of damages and attorney fees.
2013 IL App (1st) 111779.
¶4 We allowed defendants’ petition for leave to appeal. Ill. S. Ct. R. 315 (eff. July 1,
2013). We now affirm in part and reverse in part and remand to the trial court.
¶5 BACKGROUND
¶6 Plaintiffs’ malpractice claim against defendants is predicated on an underlying
cause of action against Shearson Lehman Brothers Holding, Inc. (Shearson), and other
individuals and firms (Shearson defendants) for violations of the Illinois Securities
Law. That cause of action arose from plaintiffs’ purchases of First Capital Holdings
(FCH) stock through Shearson’s broker, Michael Steinberg, who was the office
manager of Shearson’s Peoria, Illinois, office, and a close personal friend of the
plaintiffs. Plaintiffs purchased FCH stock between 1987 and 1990.
¶7 FCH filed for bankruptcy in 1991, and plaintiffs’ FCH stock became worthless.
That same year, plaintiffs retained defendant law firm to represent them in claims
arising from their purchases of the FCH stock. When plaintiffs retained defendant law
firm, they had a viable claim against the Shearson defendants for rescission under the
Illinois Securities Law. Defendants, however, failed to preserve plaintiffs’ cause of
action under the Illinois Securities Law by failing to serve the required rescission
notice.
¶8 In 1992, plaintiffs hired new counsel to pursue their claims against the Shearson
defendants. Plaintiffs’ complaint included their Illinois Securities Law claim, but that
claim was dismissed by the circuit court as time-barred.
¶9 In 1994, plaintiffs filed a malpractice action against the defendant law firm and
several of its partners to recover damages plaintiffs would have recovered under the
Illinois Securities Law if defendants had properly preserved plaintiffs’ claim. In 1996,
plaintiffs moved to transfer the malpractice action to the circuit court’s commercial
calendar. Defendants agreed not to oppose the transfer only if plaintiffs agreed to
stipulate that the trial of plaintiffs’ malpractice claim would take place only after all
claims in the underlying Steinberg case were tried or otherwise resolved. Accordingly,
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a stipulated order was entered delaying the malpractice trial until resolution of the
underlying Steinberg case.
¶ 10 In 1999, plaintiffs’ remaining claims in the underlying Steinberg case were
dismissed by the circuit court. The appellate court affirmed the dismissal of the Illinois
Securities Law claim as untimely, but reversed and remanded to the trial court
plaintiffs’ claims against the Shearson defendants for common law fraud and violation
of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud
Act) (815 ILCS 505/1 et seq. (West 2004)). Goldfine v. Steinberg, No. 1-00-1004
(2004) (unpublished order under Supreme Court Rule 23). In 2007, plaintiffs settled
those claims for $3.2 million.
¶ 11 After reaching settlement in the underlying Steinberg case, the legal malpractice
case proceeded to a bench trial that lasted over eight weeks. On July 12, 2010, the trial
court found that defendant law firm breached its duties to plaintiffs by failing to
preserve plaintiffs’ Illinois Securities Law claim and that the loss of that claim was
caused by defendant law firm’s negligent conduct. The trial court ruled that plaintiffs’
damages would be calculated according to the following formula: plaintiffs’ $3.2
million settlement would be deducted from the total they paid for their 11 stock
purchases, and then 10% interest would be calculated on the remaining amount based
on the various dates of the stock purchases. The trial court ordered the parties to
calculate the exact amount to enter in a judgment order, ordered plaintiffs to prepare the
judgment order, and gave plaintiffs leave to file a petition for attorney fees.
¶ 12 On May 24, 2011, the trial court entered its judgment, adopting the securities
purchase price and interest calculation proposed by defendants. Specifically, the trial
court took the sum of $4,506,602.05, representing the total of plaintiffs’ 11 stock
purchases in 1988, 1989, and 1990, and deducted the 2007 Steinberg settlement of $3.2
million. Because the stocks were purchased on 11 different dates, the trial court applied
a “proportionate reduction of $3,200,000.00 (71.00693%)” to each purchase to obtain a
“net” purchase price for each of the 11 stock purchases. The total sum of those net
purchase prices was $1,306,602.29. Using the net purchase price for each of the 11
purchases and the corresponding date of sale for each purchase, the trial court then
calculated a 10% annual interest award, through May 24, 2011, of $2,785,149.19, for a
total award of $4,091,752.19. The trial court also awarded plaintiffs attorney fees of
40% of the total award, or $1,636,700.80, and $207,167.28 in costs and expenses. The
trial court entered a judgment totaling $5,935,610.10.
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¶ 13 Plaintiffs appealed, arguing that the trial court failed to calculate their statutory
damages according to the mathematical formula in section 13(A) of the Illinois
Securities Law. Plaintiffs also argued that the trial court erred in failing to award
reasonable attorney fees, expenses and costs.
¶ 14 Defendants cross-appealed, arguing that the award of interest, attorney fees and
costs should be reversed because the fee-shifting and interest provisions of section
13(A) of the Illinois Securities Law are punitive and coercive and, thus, fall within the
category of damages barred by statute in legal malpractice actions. Defendants also
argued that the trial court erred in finding that plaintiffs proved their underlying Illinois
Securities Law claim.
¶ 15 The appellate court affirmed the circuit court’s findings that plaintiffs proved their
underlying Illinois Securities Law claim and legal malpractice action. The appellate
court also affirmed the circuit court’s award of plaintiffs’ costs and expenses. The
appellate court, however, determined that the circuit court failed to apply the correct
mathematical formula to calculate plaintiffs’ damages under the Illinois Securities
Law. Specifically, the appellate court held there was no basis for the trial court to
deduct the $3.2 million settlement from the purchase prices before calculating interest.
Additionally, the appellate court held that the trial court’s attorney fees award was
incorrect based on a percentage of its erroneous damage calculation. Accordingly, the
appellate court reversed the circuit court’s award of damages and attorney fees and
remanded the case to the trial court to recalculate plaintiffs’ damages, to determine a
reasonable amount of attorney fees based on the correct calculation of damages, and to
award plaintiffs attorney fees and costs incident to the appeal.
¶ 16 We allowed defendants’ petition for leave to appeal. Ill. S. Ct. R. 315 (eff. July 1,
2013). We allowed the Chicago Bar Association and the Illinois State Bar Association
to file a joint amicus brief. We also allowed the Illinois Secretary of State, Securities
Department, and the Illinois Trial Lawyers’ Association to file amicus briefs. Ill. S. Ct.
R. 345 (eff. Sept. 20, 2010).
¶ 17 ANALYSIS
¶ 18 This case turns on the proper calculation of plaintiffs’ damages in a legal
malpractice action. Specifically, the issue is whether the lower courts erroneously
compensated plaintiffs for the civil remedies they would have recovered in their
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underlying Illinois Securities Law claim but for defendants’ legal malpractice. Those
presumed damages included plaintiffs’ loss of investment, plus statutory interest on
their lost investments, attorney fees, and costs.
¶ 19 Defendants argue that the Illinois Securities Law does not authorize imposing those
damages on negligent lawyers and that its civil remedies apply only to those who
actually violate the Illinois Securities Law. Defendants further contend that the civil
remedies provided by section 13(A) of the Illinois Securities Law constitute punitive
damages and are, thus, barred in legal malpractice actions. If this court determines that
the civil remedies of section 13(A) of the Illinois Securities Law are applicable to
calculate plaintiffs’ total damages in this legal malpractice action, both parties dispute
the lower courts’ calculation of damages. We first address whether the lower courts
properly applied the civil remedies provisions of section 13(A) of the Illinois Securities
Law to calculate plaintiffs’ damages in this legal malpractice case.
¶ 20 The applicability of the civil remedies provisions of section 13(A) of the Illinois
Securities Law (815 ILCS 5/13(A) (West 2010)) in calculating damages in a legal
malpractice action is the focus of this appeal. We review de novo this question of law.
See Kankakee County Board of Review v. Property Tax Appeal Board, 226 Ill. 2d 36,
51 (2007). This appeal also presents a question of statutory interpretation, subject to de
novo review. People v. Davison, 233 Ill. 2d 30, 40 (2009).
¶ 21 This court’s primary objective in interpreting a statute is to ascertain and give effect
to the intent of the legislature. Solon v. Midwest Medical Records Ass’n, 236 Ill. 2d
433, 440 (2010). The most reliable indication of the legislature’s intent is the language
of the statute, given its plain and ordinary meaning. Solon, 236 Ill. 2d at 440. “[W]hen
the language of the statute is clear, it must be applied as written without resort to aids or
tools of interpretation.” DeLuna v. Burciaga, 223 Ill. 2d 49, 59 (2006). We begin by
reviewing the relevant provisions of the Illinois Securities Law.
¶ 22 Section 13 of the Illinois Securities Law provides for private and other civil
remedies. Section 13(A) provides the civil remedies relevant to this appeal:
Ҥ 13. Private and other civil remedies; securities.
A. Every sale of a security made in violation of the provisions of this Act
shall be voidable at the election of the purchaser exercised as provided in
subsection B of this Section; and the issuer, controlling person, underwriter,
dealer or other person by or on behalf of whom said sale was made, and each
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underwriter, dealer or salesperson who shall have participated or aided in any
way in making the sale, and in case the issuer, controlling person, underwriter
or dealer is a corporation or unincorporated association or organization, each of
its officers and directors (or persons performing similar functions) who shall
have participated or aided in making the sale, shall be jointly and severally
liable to the purchaser as follows:
(1) for the full amount paid, together with interest from the date of
payment for the securities sold at the rate of the interest or dividend
stipulated in the securities sold (or if no rate is stipulated, then at the rate of
10% per annum) less any income or other amounts received by the
purchaser on the securities, upon offer to tender to the seller or tender into
court of the securities sold or, where the securities were not received, of any
contract made in respect of the sale; or
(2) if the purchaser no longer owns the securities, for the amounts set
forth in clause (1) of this subsection A less any amounts received by the
purchaser for or on account of the disposition of the securities.
If the purchaser shall prevail in any action brought to enforce any of the
remedies provided in this subsection, the court shall assess costs together with
the reasonable fees and expenses of the purchaser’s attorney against the
defendant. Any provision of this subsection A to the contrary notwithstanding,
the civil remedies provided in this subsection A shall not be available against
any person by reason of the failure to file with the Secretary of State, or on
account of the content of, any report of sale provided for in subsection G or P of
Section 4, paragraph (2) of subsection D of Sections 5 and 6, or paragraph (2) of
subsection F of Section 7 of this Act.” 815 ILCS 5/13(A) (West 2010).
¶ 23 Defendants’ claim that section 13(A) civil remedies were not intended to be applied
to negligent attorneys in a legal malpractice action because the Illinois Securities Law
makes no provision for awarding such damages against negligent lawyers. Rather,
defendants submit that section 13(A) civil remedies are applicable only to those who
violate the Illinois Securities Law. Accordingly, defendants contend it was error for the
lower courts to compensate plaintiffs for losses the plaintiffs would have recovered
under section 13(A) in the underlying Steinberg case.
¶ 24 Illinois law on malpractice damages is well-established:
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“In order to recover damages in a legal malpractice action in Illinois, a
plaintiff must establish what the result would have been in the underlying
action which was improperly litigated by the plaintiff’s former attorney. See,
e.g., Nika v. Danz, 199 Ill. App. 3d 296, 308 (1990) (malpractice plaintiff must
litigate a ‘ “suit within a suit” ’ or ‘ “trial-within-a-trial” ’), quoting 2 R. Mallen
& J. Smith, Legal Malpractice § 27.7, at 641 (3d ed. 1989). The basis of the
legal malpractice claim is that the plaintiff would have been compensated for an
injury caused by a third party, absent negligence on the part of the plaintiff’s
attorney. Nika, 199 Ill. App. 3d at 308; Glass v. Pitler, 276 Ill. App. 3d 344, 349
(1995). The injuries resulting from legal malpractice are not personal injuries
but, instead, are pecuniary injuries to intangible property interests. Glass, 276
Ill. App. 3d at 349, citing Gruse v. Belline, 138 Ill. App. 3d 689 (1985). The
plaintiff must affirmatively prove that he suffered actual damages as a result of
the attorney’s malpractice (Glass, 276 Ill. App. 3d at 349), and a plaintiff who
obtains recovery in a malpractice suit can be ‘in no better position by bringing
suit against the attorney than if the underlying action against the third-party
tortfeasor had been successfully prosecuted’ (Bloome v. Wiseman, Shaikewitz,
McGivern, Wahl, Flavin & Hesi, P.C., 279 Ill. App. 3d 469, 478 (1996)). Thus,
a plaintiff’s damages in a malpractice suit are limited to the actual amount the
plaintiff would have recovered had he been successful in the underlying case.”
(Emphasis added.) Eastman v. Messner, 188 Ill. 2d 404, 411-12 (1999).
¶ 25 While it is true that the Illinois Securities Law makes no specific provision for
imposing damages on negligent lawyers, we point out that defendants’ argument is
premised on the misconception that the civil remedies provided under section 13(A) of
the Illinois Securities Law are being applied directly to them. The damage award in this
legal malpractice action compensates the plaintiffs for the actual amount the plaintiffs
would have recovered had they been successful in the Illinois Securities Law claim in
the underlying Steinberg case. Contrary to defendants’ assertion, the Illinois Securities
Law is not being applied directly to defendants. Rather, section 13(A) of the Illinois
Securities Law simply establishes plaintiffs’ actual damages resulting from
defendants’ legal malpractice.
¶ 26 It is undisputed that defendants were found negligent for failing to preserve
plaintiffs’ cause of action under the Illinois Securities Law. It is also undisputed that, as
a result of defendants’ failure to preserve plaintiffs’ cause of action, plaintiffs were
prevented from collecting civil remedies under section 13(A) of the Illinois Securities
Law in the underlying Steinberg case. Plaintiffs suffered substantial losses that were
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directly and proximately caused by defendants’ negligence and constitute actual
damages suffered by plaintiffs as a result of defendants’ legal malpractice. Defendants
do not dispute that plaintiffs would have recovered the civil remedies under section
13(A) had defendants not breached their duty and failed to preserve plaintiffs’ Illinois
Securities Law claim. As a result, defendants are liable to plaintiffs for those losses that
were directly caused by defendants’ legal negligence and constitute actual damages
suffered by plaintiffs as a result of defendants’ legal malpractice. See Eastman, 188 Ill.
2d at 411-12. Simply put, the civil remedies provided under section 13(A) of the
Illinois Securities Law are merely the mechanism used to compute plaintiffs’ actual
losses caused by defendants’ legal malpractice.
¶ 27 Defendants also assert they should not be held liable for plaintiffs’ lost interest
under section 13(A) because it puts attorneys in the untenable position of having to
wait helplessly on the sidelines as interest accumulates while the underlying case is
being resolved. We note that it was defendants who insisted that plaintiffs agree to stay
the legal malpractice action pending resolution of the Steinberg case. While plaintiffs’
damages arguably could not be fully ascertained until the underlying Steinberg case
was resolved, nothing prohibited defendants from attempting to settle the legal
malpractice action with plaintiffs, particularly given the known risk of the extent of
damages in this case based on plaintiffs’ significant investment loss. This court’s
“responsibilities as a court of review do not extend to protecting a party from its own
failed trial strategy” (Giese v. Phoenix Co. of Chicago, Inc., 159 Ill. 2d 507, 514-15
(1994)). Nevertheless, defendants argue that compensation for plaintiffs’ lost section
13(A) civil remedies constitute punitive damages that are barred in legal malpractice
actions by section 2-1115 of the Code of Civil Procedure (Code) (735 ILCS 5/2-1115
(West 2010)). Section 2-1115 of the Code provides:
“Punitive damages not recoverable in healing art and legal malpractice
cases. In all cases, whether in tort, contract or otherwise, in which the plaintiff
seeks damages by reason of legal, medical, hospital, or other healing art
malpractice, no punitive, exemplary, vindictive or aggravated damages shall be
allowed.” 735 ILCS 5/2-1115 (West 2010).
¶ 28 Whether the civil remedy provisions of section 13(A) of the Illinois Securities Law
constitute punitive damages barred under section 2-1115 involves an issue of law that
we review de novo. Kankakee County Board of Review, 226 Ill. 2d at 51. This court has
determined that a statute is a “penalty” if it is “in the nature of punishment for the
nonperformance of an act or for the performance of an unlawful act.” Hoffmann v.
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Clark, 69 Ill. 2d 402, 429 (1977); see also M.H. Vestal Co. v. Robertson, 277 Ill. 425,
428-29 (1917). Moreover, a penal statute requires the transgressor to pay a penalty
without regard to proof of any actual monetary injury sustained. See Babcock v.
Harrsch, 310 Ill. 413, 417 (1923).
¶ 29 Defendants argue that the civil remedies provisions of section 13(A) are coercive
and punitive in nature because those remedies, as applied in a legal malpractice action,
neither punish the actual wrongdoers nor compel compliance with securities laws.
Defendants argue that the damages in this case are punitive, primarily because of the
potential size of the damage award on remand. Defendants cite to Foreman v.
Holsman, 10 Ill. 2d 551, 553-54 (1957), in support of their argument that section 13(A)
civil remedies constitute punitive damages.
¶ 30 Foreman does not support defendants’ argument that section 13(A) civil remedies
constitute punitive damages. While Foreman stated that the civil remedies provision of
the Illinois Securities Law “is intended to afford an additional punishment for an
offending party,” (Foreman, 10 Ill. 2d at 553-54) this court did not discuss the interest
provision at issue in this case, nor did this court specifically examine whether section
13(A) civil remedies constitute punitive damages or were intended to be remedial. In
fact, this court has never before squarely addressed the issue of whether section 13(A)
civil remedies constitute punitive damages. Similarly, none of the appellate court cases
cited by defendants (Jacobs v. James, 215 Ill. App. 3d 499 (1991); Condux v. Neldon,
83 Ill. App. 3d 575 (1980); Bain v. Financial Security Life Insurance Co., 53 Ill. App.
3d 702 (1977); Gowdy v. Richter, 20 Ill. App. 3d 514 (1974)) support defendants’
contention because none of those cases examined or held that section 13(A) civil
remedies constitute punitive damages. We therefore examine whether the civil
remedies of section 13(A) of the Illinois Securities Law constitute punitive or remedial
damages as an issue of first impression before this court.
¶ 31 The law on analyzing whether statutory provisions are punitive or remedial is
well-established. This court summarized Illinois law with respect to this issue in Landis
v. Marc Realty, L.L.C., 235 Ill. 2d 1 (2009):
“[A] statutory penalty must: (1) impose automatic liability for a violation of its
terms; (2) set forth a predetermined amount of damages; and (3) impose
damages without regard to the actual damages suffered by the plaintiff.”
Landis, 235 Ill. 2d at 13 (citing McDonald’s Corp. v. Levine, 108 Ill. App. 3d
732, 738 (1982), citing Hoffmann, 69 Ill. 2d at 429).
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¶ 32 A remedial statute, on the other hand, imposes liability for actual damages suffered
by the plaintiff as a result of a violation of the statute. Landis, 235 Ill. 2d at 13. Liability
under a remedial statute “ ‘is contingent upon damage being proven by the plaintiff.’ ”
Landis, 235 Ill. 2d at 13 (quoting McDonald’s Corp. v. Levine, 108 Ill. App. 3d at 738,
citing Vestal, 277 Ill. at 429-30).
¶ 33 Section 13(A) civil remedies include interest on the securities, attorney fees and
costs. None of those remedies are imposed as a predetermined amount without regard
to the actual damages suffered by the plaintiff. Rather, each of the section 13(A) civil
remedies is a component of remedial damages intended to compensate plaintiffs who
prove actual damages resulting from a violation of the Illinois Securities Law. The
Illinois Securities Law contains no express provision for recovery of “punitive
damages.” It is clear that the purpose of private civil remedies provided by the Illinois
Securities Law is to compensate plaintiffs for their actual monetary losses. Section
13(A) provides for return of the full amount paid for the securities, together with
interest “at the rate of the interest or dividend stipulated in the securities sold (or if no
rate is stipulated, then at the rate of 10% per annum).” The plain language of section
13(A) indicates the rate is intended to be compensatory, not punitive. The controlling
rate is the amount stated in the securities. Thus, the statute compensates the investor for
the return on investment stated in the purchased securities. If no rate is stipulated, the
default rate is 10%. The plain language of the statute indicates intent to compensate
investors for their lost return and to make the investor whole. Accordingly, we hold that
section 13(A) remedies do not constitute punitive damages prohibited by section
2-1115 of the Code.
¶ 34 Defendants also rely on this court’s ruling in Tri-G, Inc. v. Burke, Bosselman &
Weaver, 222 Ill. 2d 218 (2006), in arguing that section 13(A) civil remedies cannot be
imposed on negligent lawyers. In Tri-G, the plaintiff brought a legal malpractice action
against a law firm for failing to prosecute its lawsuit against a bank. The underlying
lawsuit against the bank alleged breach of contract, common law fraud, and violation of
the Consumer Fraud Act. The lawsuit was dismissed with prejudice after plaintiff’s
counsel was not prepared to proceed when the case was called for trial. Plaintiff was
awarded compensatory and lost punitive damages against the law firm in the legal
malpractice action. This court held that lost punitive damages are not recoverable in a
subsequent legal malpractice action under section 2-1115 of the Code. Tri-G, 222 Ill.
2d at 267-68. We have already determined, however, that section 13(A) civil remedies
are not punitive damages prohibited by section 2-1115 of the Code. Accordingly,
Tri-G’s holding concerning punitive damages is inapplicable.
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¶ 35 Defendants also argue that section 13(A)’s civil remedy of statutory interest is
prohibited under Tri-G. In Tri-G, this court rejected the plaintiff’s claim for
postjudgment interest under section 2-1303 of the Code (735 ILCS 5/2-1303 (West
2002)) recoverable on a “hypothetical” judgment in the underlying case absent the
legal malpractice. Tri-G, 222 Ill. 2d at 258. This court recognized in Tri-G that the right
to interest in an action at law:
“ ‘does not emanate from the controversy, or from the judgment, or from
anything of a judicial nature. *** The recovery of interest in this State, not
contracted for, finds its only authority in the statute. It is purely statutory.’ ”
Tri-G, 222 Ill. 2d at 256 (quoting Blakeslee’s Storage Warehouses, Inc. v. City
of Chicago, 369 Ill. 480, 483 (1938)).
¶ 36 We acknowledged that an exception to this rule exists in equity, but since a legal
malpractice action is an action at law, the exception is inapplicable. Tri-G, 222 Ill. 2d at
257-58. Accordingly, in Tri-G, this court agreed with the appellate court’s holding that
section 2-1303 postjudgment interest applies only to judgments recovered, and not to
judgments that should have been recovered. Tri-G, 222 Ill. 2d at 256. We also
determined that prejudgment interest is not available in legal malpractice cases. Tri-G,
222 Ill. 2d at 258.
¶ 37 Tri-G is distinguishable on this point. This appeal does not involve interest on a
hypothetical judgment. Section 13(A) does not involve prejudgment or postjudgment
interest. Section 13(A) interest is not based on the amount of judgment. Rather, section
13(A) interest is calculated based on the amount of the plaintiff’s investment in
securities. The interest is a component of the remedial relief that plaintiffs would have
recovered under the Illinois Securities Law if defendants had not negligently failed to
preserve plaintiffs’ claim. Defendants do not dispute that plaintiffs would have
recovered section 13(A) interest in the underlying cause of action.
¶ 38 Alternatively, defendants argue that this court should reverse the appellate court
opinion because it ordered a grossly excessive award that is speculative and violates
Eastman, 188 Ill. 2d 404, as well as state and federal due process guarantees.
Defendants claim that the appellate court opinion violates Eastman because it awarded
plaintiffs interest until final judgment in the malpractice case. In fact, defendants argue
that plaintiffs should be barred from recovering any statutory interest because they
failed to prove when they reasonably would have recovered on the underlying Illinois
Securities Law claim.
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¶ 39 We agree with defendants that awarding statutory interest through the final date of
judgment in the malpractice action violates Eastman because it awards plaintiffs
damages beyond the date they would have recovered interest in the underlying action.
See Eastman, 188 Ill. 2d at 412 (“a plaintiff’s damages in a malpractice suit are limited
to the actual amount the plaintiff would have recovered had he been successful in the
underlying case”). However, nothing in Eastman precludes plaintiffs from recovering
the statutory interest they would have recovered in the underlying Steinberg action.
¶ 40 We reject defendants’ argument that plaintiffs should be barred from recovering
any statutory interest because they failed to prove a date when they reasonably would
have recovered on the underlying Illinois Securities Law claim. Defendants cite to
Tri-G, 222 Ill. 2d at 254-55, to support their argument that a plaintiff is required to
prove the date they would have recovered in the underlying action absent attorney
malpractice. In Tri-G, the plaintiff sought prejudgment interest from the date the
third-party tortfeasor committed the acts in the underlying case to the approximate date
a verdict would have been entered against the third-party tortfeasor but for the
attorney’s negligence. In Tri-G, this court did not examine or find that the plaintiff
proved, or was required to prove, a hypothetical date when the plaintiff would have
recovered in the underlying cause of action. In other words, Tri-G does not support
defendant’s argument. Defendants cite to no authority holding that plaintiffs in a legal
malpractice action must prove a hypothetical date when they reasonably would have
recovered damages in an underlying cause of action that was barred due to the
attorney’s negligence.
¶ 41 Defendants also argue that the appellate court opinion violates Eastman because it
awarded interest on the $3.2 million plaintiffs recovered that did not constitute
malpractice damages. We reject this argument. It is clear that plaintiffs would have
received statutory interest on the entire amount they paid for the securities in the
underlying Steinberg cause of action if defendants had preserved their Illinois
Securities Law cause of action. Those losses constitute actual damages and do not,
therefore, violate Eastman.
¶ 42 Defendants argue that if this court determines that awarding interest on the entire
investment did not violate Eastman, awarding interest after June 21, 2007, the date the
plaintiffs settled all claims in the Steinberg action, was erroneous. Defendants claim
that any recovery of interest after June 21, 2007, exceeds what plaintiffs would have
recovered in the underlying suit, and therefore violates Eastman. We agree with
defendants on this point. As we have already held, awarding statutory interest through
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the final date of judgment in the malpractice action violates Eastman because it awards
plaintiffs damages beyond the date they would have recovered interest in the
underlying Steinberg action. We reiterate, however, that nothing in Eastman precludes
plaintiffs from recovering the statutory interest they would have recovered in the
underlying Steinberg action. We will address this issue in greater detail in our analysis
of the proper calculation of section 13(A) damages.
¶ 43 Defendants next contend that awarding statutory interest plus attorney fees is
grossly excessive and violates the United States and Illinois Constitutions’ prohibitions
against grossly excessive penalties in violation of due process of law. U.S. Const.,
amend. XIV, § 1; Ill. Const. 1970, art. I, § 2. Defendants claim the Illinois Securities
Law is unconstitutional as applied here. According to defendants, awarding statutory
interest plus attorney fees in this case transforms an actual minimal loss into grossly
excessive damages on lawyers “who were merely negligent.”
¶ 44 “The Due Process Clause of the Fourteenth Amendment prohibits a State from
imposing a ‘grossly excessive’ punishment on a tortfeasor.” (Internal quotation marks
omitted.) BMW of North America, Inc. v. Gore, 517 U.S. 559, 562 (1996). In BMW of
North America, the United States Supreme Court set three guideposts for determining
whether the punishment a State imposes on a tortfeasor under State law violates the
U.S. Constitution: (1) the degree of reprehensibility of the defendant’s misconduct; (2)
the disparity between the actual or potential harm suffered by the plaintiff and the
punitive damages award; and (3) the difference between the punitive damages awarded
and the civil penalties authorized or imposed in comparable cases. BMW of North
America, 517 U.S. at 574-75.
¶ 45 In International Union of Operating Engineers, Local 150 v. Lowe Excavating Co.,
225 Ill. 2d 456, 466-67 (2006), this court held that due process “prohibits the
imposition of grossly excessive or arbitrary punishments on a tortfeasor.” This court
adopted the Supreme Court’s framework in BMW of North America, recognizing that
“ ‘the most important indicium of the reasonableness of a punitive damages award is
the degree of reprehensibility of the defendant’s conduct.’ ” International Union of
Operating Engineers, 225 Ill. 2d at 470 (quoting BMW of North America, 517 U.S. at
575).
¶ 46 Defendants’ argument wrongly assumes the award of statutory interest under
section 13(A) amounts to punitive damages. We have already rejected this argument.
Defendants, however, argue that nothing in either the State or Federal Due Process
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Clauses limits their reach to punitive damages. Defendants focus on the amount of a
total potential award of both interest plus attorney fees in this case. Defendants argue
this would amount to an excessive judgment. We disagree. The amount of statutory
interest simply constitutes plaintiffs’ actual damages incurred on their loss of
investment income on $4.5 million as a result of defendants’ negligence. The appellate
court already determined the trial court must reconsider the attorney fee award on
remand, and that amount has yet to be determined. We do not know what the trial court
will determine is a reasonable attorney fee on remand, and that issue is beyond the
scope of this appeal. However, as we address below, both lower courts erred in
calculating the plaintiffs’ statutory interest damages. The result is neither grossly
excessive, nor will a proper calculation of damages result in a windfall recovery to
plaintiffs. Rather, a proper calculation of damages simply compensates plaintiffs for
the damages they would have recovered from the third-party tortfeasor in the
underlying action but for defendants’ negligence in failing to preserve plaintiffs’ cause
of action.
¶ 47 Accordingly, we hold that the lower courts did not err as a matter of law in using the
civil remedy provisions of section 13(A) of the Illinois Securities Law to measure
plaintiffs’ damages in this legal malpractice action. We do, however, disagree with the
lower courts’ calculation of plaintiffs’ damages. We now address the proper
application of section 13(A) in calculating plaintiffs’ damages in this legal malpractice
action.
¶ 48 The proper interpretation and application of the Illinois Securities Law is a question
of law and, thus, we review the application of section 13(A) in measuring plaintiffs’
damages de novo. Woods v. Cole, 181 Ill. 2d 512, 516 (1998). Again, the primary
objective in interpreting a statute is to ascertain and give effect to the intent of the
legislature, and the most reliable indication of legislative intent is the language of the
statute, given its plain and ordinary meaning. Solon, 236 Ill. 2d at 440. “[W]hen the
language of the statute is clear, it must be applied as written without resort to aids or
tools of interpretation.” DeLuna, 223 Ill. 2d at 59.
¶ 49 Sections 13(A)(1) and (2) of the Illinois Securities Law provide the statutory
damages as follows:
“(1) for the full amount paid, together with interest from the date of
payment for the securities sold at the rate of the interest or dividend stipulated
in the securities sold (or if no rate is stipulated, then at the rate of 10% per
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annum) less any income or other amounts received by the purchaser on the
securities, upon offer to tender to the seller or tender into court of the securities
sold or, where the securities were not received, of any contract made in respect
of the sale; or
(2) if the purchaser no longer owns the securities, for the amounts set forth
in clause (1) of this subsection A less any amounts received by the purchaser for
or on account of the disposition of the securities.” 815 ILCS 5/13(A)(1), (2)
(West 2010).
¶ 50 Section 13(A) provides a straightforward method for calculating plaintiffs’
damages for defendants’ failure to preserve their Illinois Securities Law claim.
Plaintiffs would have recovered “the full amount paid, together with interest from the
date of payment for the securities sold,” less “any amount received.” We find that the
statute unambiguously requires the calculation of interest prior to deducting any
amounts received by the purchaser of the securities. Accordingly, we affirm the
appellate court’s determination that the trial court erroneously applied a proportionate
reduction of the plaintiffs’ $3.2 million Steinberg settlement to each of the 11 securities
purchases prior to calculating interest. The interest must be calculated by the trial court
prior to deducting the $3.2 million settlement.
¶ 51 Defendants claim that plaintiffs should not be awarded interest on the $3.2 million
settlement. However, defendants fail to recognize that plaintiffs lost the interest on
their total securities investment when defendants failed to preserve their Illinois
Securities Law claim. Any calculation of interest must include compensation for
plaintiffs’ loss of interest on their entire $4.5 million investment.
¶ 52 The statute requires interest calculated “from the date of payment” for the
securities. Under a plain reading of the statute, the trial court is required to calculate
interest on each of the 11 securities from the date of purchase. The parties dispute
whether the statutory interest should be calculated to the 2007 settlement date of the
underlying Steinberg action, or to the 2011 date of the final judgment in the legal
malpractice action. Plaintiffs further submit that interest should be calculated to the
date of payment of the judgment. Under plaintiffs’ argument, interest presently
continues to accumulate, some seven years beyond the date of the Steinberg settlement.
Understandably, defendants conclude that awarding interest to the date of payment of
the judgment would result in extraordinary legal malpractice damages. Defendants as
well as the Chicago Bar Association and the Illinois State Bar Association as amici
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present serious and compelling arguments of the consequences of imposing
extraordinary liability on attorneys as well as the practical ramifications on the
practicing bar. Given the disposition in this case, the plaintiffs’ ultimate recovery will
compensate plaintiffs for the loss of their investment due to defendants’ negligence in
failing to preserve plaintiffs’ Illinois Securities Law claim.
¶ 53 The appellate court determined that the trial court correctly calculated interest
through the 2011 final judgment date in the legal malpractice action. As we have
already indicated, calculating interest to the date of the final judgment in the legal
malpractice action violates Eastman, 188 Ill. 2d 404. We hold that the interest should
have been calculated to the date of the 2007 settlement of the Steinberg action. The
measure of damages in the legal malpractice action is the amount the plaintiffs would
have recovered in the underlying Steinberg action for their Illinois Securities Law
claim. The entire Steinberg action was concluded in 2007. Plaintiffs could not have
recovered interest on their Illinois Securities Law claim in the Steinberg action after the
2007 settlement date. By calculating interest to 2011, the lower courts misapplied
section 13(A).
¶ 54 Accordingly, on remand, the trial court must recalculate the interest on each of the
securities to the date of the 2007 Steinberg settlement. The recalculation of interest
should then be added to the full amount paid for all of the securities. Section 13(A)(2)
then requires a deduction for any amount received by the purchaser on account of the
disposition of the securities when the purchaser no longer owns the securities.
Therefore, the trial court must deduct the plaintiffs’ $3.2 million settlement after
recalculating the interest.
¶ 55 Plaintiffs requested cross-relief, arguing that the entire $3.2 million settlement
should not be deducted from their damage award because they actually received only
$1,657,000 of that settlement and they expended $1,543,000 in costs and attorney fees
to obtain the $3.2 million settlement. In the underlying Steinberg cause of action, the
plaintiffs and the Shearson defendants entered into a settlement agreement after
plaintiffs’ Illinois Securities Law claim was dismissed with prejudice as time-barred.
That dismissal was affirmed on appeal. Plaintiffs’ settlement in the underlying
Steinberg action was not structured into an award of damages plus attorney fees and
costs. Rather, plaintiffs’ settlement represented their agreement to settle all disputes
and claims that could have been asserted. Plaintiffs agreed to a joint motion to obtain a
dismissal with prejudice of the underlying lawsuit, with the parties “to bear their own
costs and attorneys’ fees.” Plaintiffs’ expenditures for attorney fees and costs were
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simply their cost of litigation pursuing their common law fraud and Consumer Fraud
Act claims. Accordingly, under section 13(A), the entire $3.2 million settlement
constitutes “other amounts received by the purchaser on the securities.” Section 13(A)
makes no provision for the deduction of attorney fees or costs from those “other
amounts received.” Thus, we reject plaintiff’s argument that the entire $3.2 million
should not be deducted from their damage award.
¶ 56 The appellate court in this case also held that the trial court’s attorney fees award
was based on a percentage of its incorrect damage calculation. The trial court awarded
plaintiffs $1,636,700.80 in attorney fees, calculated by applying a 40% contingency fee
to its erroneous Illinois Securities Law damage award calculation of $4,091,752.19.
The appellate court noted that the trial court could base an attorney fee award on either
a fair percentage of recovery, or the value of the time expended by counsel. The
appellate court stated that it “would not assume that the trial court, which considered
the connection between the fees sought and the amount of the award, would have
awarded plaintiffs a 40% contingent fee of a much larger Illinois Securities Law
damage award based on plaintiffs’ purchase price, plus 10% interest, less the $3.2
million settlement.” Accordingly, the appellate court reversed the attorney fee award
and remanded the case to the trial court to determine reasonable attorney fees based on
the correct amount of plaintiffs’ Illinois Securities Law damages. The parties do not
contest this part of the appellate court’s judgment. Thus, the award of attorney fees in
this case is not at issue and not addressed in this opinion.
¶ 57 In sum, we hold that the lower courts failed to apply the correct mathematical
formula to calculate plaintiffs’ statutory interest award for damages under section
13(A) of the Illinois Securities Law. Accordingly, we remand this cause to the circuit
court to calculate plaintiffs’ statutory interest damages on the full amount paid for each
security from the date of purchase to the 2007 date of settlement in the Steinberg
action, and then to deduct the plaintiffs’ $3.2 million recovery in the Steinberg action.
The issue of attorney fees and costs are left for the trial court to resolve on remand.
¶ 58 CONCLUSION
¶ 59 For the foregoing reasons, we affirm the appellate court’s judgment in part and
reverse in part, and remand for further proceedings consistent with this opinion.
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¶ 60 Affirmed in part and reversed in part.
¶ 61 Cause remanded with directions.
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