Edelman, Combs & Latturner v. Hinshaw & Culbertson

Citation: Not availableDocket: 1-01-3638 Rel

Court: Appellate Court of Illinois; March 26, 2003; Illinois; State Appellate Court

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The appellate case No. 1-01-3638 concerns the dismissal of a complaint by plaintiffs Daniel Edelman, Cathleen Combs, James Latturner, Tara Goodwin, and their law firm against defendants Robert H. Muriel, David M. Schultz, Peter D. Sullivan, the law firm Hinshaw & Culbertson, and its clients, Credit Protection Association, L.P. and Etan General, Inc. Plaintiffs allege that defendants unlawfully published a legal memorandum containing false accusations that Edelman and his firm engaged in dishonest litigation tactics. 

On appeal, plaintiffs challenge the trial court’s dismissal under section 2-619.1 of the Illinois Code of Civil Procedure, arguing that defendants' communications were not protected by privilege and that they sufficiently stated claims for libel per se, intentional interference with prospective economic advantage, and civil conspiracy. The court's opinion affirms in part and reverses in part the trial court's decision.

The background of the case involves a conflict between several law firms regarding bankruptcy and consumer protection practices. Feld, Korrub represents debtors in bankruptcy and refers potential consumer claims to Edelman, while Hinshaw defends against these claims. The plaintiffs allege a hostile relationship between Edelman and Hinshaw, leading to the publication of the libelous statements, which stem from bankruptcy and consumer lawsuits involving debtor Charles Harris. These events include the filing of a chapter 7 bankruptcy petition, the disclosure of Harris's consumer claims, and subsequent consumer litigation initiated by Edelman under the Fair Debt Collection Practices Act against CPA, Etan, and Media One, with legal representation provided by Hinshaw and Jenner.

On November 9, 1998, Jenner submitted 'Media One's Answer to Class Action Complaint,' asserting that Harris lacked standing to pursue a consumer claim, which should belong to the trustee of Harris's bankruptcy estate. Jenner drafted a supporting memorandum, referred to as the 'Harris memorandum,' accusing Edelman and other bankruptcy firms of concealing assets from bankruptcy trustees to later file claims as class action lawsuits. This concealment is alleged to violate federal bankruptcy law, criminal law, and professional responsibility rules. The memorandum claimed that the trustee failed to address Harris's consumer claim due to a pattern of concealment by Edelman and its affiliates, specifically stating that they routinely hide claims from trustees until after the cases are closed. Jenner's preliminary investigation reportedly found circumstantial evidence of this practice among Edelman, Combs, and Feld, Korrub. 

On March 15, 1999, Jenner attorneys faxed a draft of the memorandum and supporting materials to Hinshaw's offices, and the final version was filed with the federal district court on March 16, 1999. Plaintiffs alleged that Jenner made significant last-minute changes to the final version, particularly in the number of concealed cases, suggesting manipulation to achieve a predetermined outcome. The conclusion regarding concealment remained consistent between both versions. Additionally, in March 1999, Jenner informed a U.S. Trustee's Office employee about the memorandum and promised to send it to them. The complaint also claims that Jenner acted as an agent for several parties, including Hinshaw and others.

In a related case, Feld, Korrub filed a Chapter 7 bankruptcy petition for Carol and Monte Frys on August 31, 1998. The assigned trustee, Bruce de'Medici, initially reported no assets for the estate. However, on October 21, 1998, Feld, Korrub amended the schedule to list six potential consumer claims, declaring them exempt from the estate. This went unchallenged by creditors, leading to a discharge of debts and de'Medici as trustee by December 29, 1998. Subsequently, on January 12, 1999, Edelman filed a consumer class action lawsuit threatening substantial liability for Dayton Hudson, despite the initial low individual claims from Carol Frys. On February 18, 1999, de'Medici sought to reopen the Frys bankruptcy estate to revise his previous report.

On March 2, 1999, the bankruptcy court heard a motion and allowed the trustee until March 16, 1999, to submit a brief. On March 11, 1999, Hinshaw became substitute counsel for Dayton Hudson in the Frys consumer lawsuit. On March 16, at 10:51 a.m., Hinshaw, Muriel, and Schultz shared a draft Harris memorandum with de'Medici related to the motion. Later that day, Jenner published the final Harris memorandum on behalf of multiple defendants, including Hinshaw and AIG. De'Medici submitted the brief to the bankruptcy court around March 18, 1999. Allegations arose that after March 15, 1999, Hinshaw provided the draft memorandum to an unidentified individual to anonymously forward it to the ARDC and U.S. Trustee's Office. On April 2, 1999, Hinshaw, Muriel, and Schultz sent the memorandum to attorney Debra A. Osmond, and between March 15 and June 23, 1999, they allegedly shared it with attorney Mark Leopold, both of whom were not involved in the related bankruptcy case or consumer lawsuit.

The plaintiffs assert that Hinshaw, Schultz, and Muriel were aware of the draft's inaccuracies due to their knowledge of the subject and the significant alterations made before the final version. They allege the defendants intended to undermine Feld, Korrub's referral relationship with Edelman by distributing the memorandum, which led to ARDC and U.S. Trustee's inquiries that resulted in Feld, Korrub ceasing referrals to Edelman, causing Edelman damages exceeding $50,000 and punitive damages.

Additionally, the complaint claims that from March 1999 onward, Hinshaw, CPA/Etan, AIG, Muriel, Schultz, and Sullivan conspired to defame Edelman, misuse confidential financial information, and interfere with Edelman’s economic expectations. They allegedly colluded to sabotage the Harris consumer action and influence de'Medici’s brief to reopen the Frys bankruptcy estate. The plaintiffs contend AIG and CPA/Etan were joint principals of Hinshaw, with Hinshaw's attorneys acting as agents within the scope of their agency. All defendants are accused of jointly acting to undermine the Harris lawsuit by spreading false statements about Edelman, leading to a civil conspiracy count in the eight-count complaint filed on February 29, 2000, which includes allegations of libel per se and intentional interference with economic advantage.

The original complaint included all current defendants except Sullivan and named Jenner, Jenner's attorneys, and a paralegal, all of whom were later dismissed due to a settlement with Edelman. The remaining defendants moved to dismiss, and the court allowed Edelman to file an amended complaint instead of responding to the motions. Following the dismissal of the amended complaint, plaintiffs filed a second amended complaint on March 29, 2001, which included five counts of libel per se related to the Harris memorandum and additional counts for intentional interference with prospective economic advantage and civil conspiracy. 

On May 3, 2001, CPA/Etan and AIG moved to dismiss, arguing that the complaint did not implicate them. On July 9, 2001, the Hinshaw defendants filed a motion to dismiss, claiming all statements were privileged and that counts III, V, VI, and VII failed to state a cause of action. The trial court granted this motion on September 17, 2001, prompting the plaintiffs to file a timely appeal.

Section 2-619.1 of the Code allows for a combination of motions to dismiss based on insufficient pleadings and certain defects or defenses. In ruling on such motions, the court accepts all well-pleaded facts as true and draws reasonable inferences in favor of the nonmoving party. The court’s review of dismissal motions under sections 2-615 and 2-619 is de novo. Section 2-619 allows for involuntary dismissal based on affirmative defenses, such as privilege in defamation cases. This privilege is based on the notion that certain conduct, which would normally be actionable, can escape liability if it serves a socially important interest. Absolute privilege applies in specific contexts, including attorney litigation privilege.

An attorney is granted an absolute privilege to publish false and defamatory material related to communications in connection with judicial proceedings they are involved in, as outlined in the Restatement (Second) of Torts §586. This privilege extends to preliminary communications and is founded on public policy that allows attorneys the freedom necessary to advocate for their clients. However, this privilege is narrowly defined, applying only to communications that are directly related to the litigation and made by authorized participants.

In the case discussed, the Hinshaw defendants, representing Dayton Hudson in the Frys bankruptcy case, sent a memorandum to the bankruptcy trustee, which was intended to potentially reopen the bankruptcy proceeding. This communication was deemed absolutely privileged because it was made in the context of a judicial proceeding, aimed at advancing the client's interests, and directed to an authorized participant, the bankruptcy trustee. The trustee's role is akin to that of a court, given their quasi-judicial functions, which necessitate a free flow of information for effective management of the bankruptcy process.

Consequently, the court concluded that the communication to the trustee was absolutely privileged, leading to the dismissal of count I of the complaint. However, counts IV and V, which involved communications of the Harris memorandum to attorneys without a direct connection to the litigation, did not qualify for this privilege, as Illinois law does not extend this protection to individuals not connected to the lawsuit.

The complaint lacks allegations that attorneys Hinshaw, Osmond, and Leopold were either opponents or shared a common opponent in ongoing litigation. It merely identifies Osmond and Leopold as "attorneys" with no connection to the Harris bankruptcy estate or related consumer lawsuit. Defendants failed to show how sharing the Harris memorandum with these attorneys benefited any client, rendering the attorney litigation privilege inapplicable. Defendants also invoke the qualified privilege articulated in Kuwik v. Starmark, which requires that a statement be made in good faith, serve a legitimate interest or duty, be limited in scope, made on an appropriate occasion, and properly communicated to the right parties. The court emphasized that the inquiry must balance the interest to be protected against potential harm from defamatory statements. The Kuwik decision identified three categories of communications with qualified privilege: those concerning the interest of the publisher, the recipient, or the public interest. However, defendants could not substantiate any legitimate interest in communicating allegations to Osmond and Leopold, as they were merely described as generic attorneys without any actionable role. The trial court erred by finding the communications privileged without evidence of social importance. The complaint also requires factual sufficiency to survive a motion to dismiss under section 2-615, as Illinois law mandates fact pleading. Merely stating conclusions is inadequate; instead, ultimate facts supporting the cause of action must be explicitly detailed.

In *People ex rel. Fahner v. Carriage Way West, Inc.*, the plaintiffs allege that Jenner and its attorneys sent a memorandum to the trustee in collaboration with other defendants, asserting that despite Jenner's settlement, the remaining defendants are liable for Jenner's actions. They reference the legal principle that a release of an agent typically releases the principal. However, plaintiffs argue this isn't an agency relationship but a conspiracy, citing relevant case law. The court emphasizes that simply labeling actions as a conspiracy does not suffice to avoid dismissal; the acts of an agent are legally considered the acts of the principal, negating a conspiracy claim between them. The court found the plaintiffs' factual basis for a conspiracy claim lacking, leading to the dismissal of Count II.

Count III's claim regarding the publication of the Harris memorandum to 'John Doe' was dismissed due to insufficient detail, failing to specify whom the statements were made to or the circumstances surrounding the communication, despite more detailed allegations elsewhere in the complaint. 

Count IV, asserting that Hinshaw, Muriel, and Schultz sent the memorandum to attorney Osmond, was upheld as it clearly stated a libel per se claim, specifying the parties and circumstances involved. 

Count V, alleging communication of the draft Harris memorandum to attorney Mark F. Leopold, was dismissed for vagueness concerning the manner of communication, as plaintiffs admitted they could not specify how Leopold received the memorandum, failing to present essential facts for the claim.

Count VI, claiming intentional interference with prospective economic advantage based on the publication to 'John Doe,' was also deemed deficient for similar reasons, lacking clarity about the intent and circumstances of the alleged interference.

To establish a cause of action for interference with prospective economic advantage, it is necessary to demonstrate: (1) a valid business relationship or expectancy, (2) the interferor's knowledge of this relationship or expectancy, (3) intentional interference leading to a breach or termination, and (4) damages resulting from the disruption. The claim in Count III fails because it does not specify to whom the alleged libelous statements were published, merely asserting that Hinshaw caused a breach between Feld, Korrub, and Edelman. Additionally, communications to the ARDC are privileged, further undermining this count.

Count VII, alleging civil conspiracy, also fails due to the established agency relationship among the defendants. Specifically, CPA/Etan and AIG are considered joint principals of Hinshaw, while Muriel, Schultz, and Sullivan are agents of each other and Hinshaw. Under agency law, the actions of agents are legally attributed to principals, thus negating the possibility of conspiracy among them.

Defendants CPA/Etan and AIG argue that they cannot be vicariously liable for their attorneys' alleged torts. A previous court panel determined that an attorney's misconduct is attributable to their clients, but there is dissenting opinion suggesting that attorneys should be regarded as independent contractors unless explicitly directed otherwise. The allegations against CPA/Etan and AIG lack sufficient factual support to establish their authorization or control over Hinshaw's conduct. Consequently, the circuit court's dismissal of Counts I, II, III, V, VI, and VII is affirmed, and all claims against CPA/Etan, AIG, and Peter D. Sullivan are dismissed. However, the decision regarding Count IV is reversed, and the matter is remanded for further proceedings.