VOLUME 9, ISSUE 2

PROFESSIONAL LIABILITY DEFENSE QUARTERLY

SPRING 2017

DEFENDING PROFESSIONALS WHEN SUED BY BANKRUPT INSIDEI N S I D E TTHISH I S IISSUE:SSU E : ENTITIES, BY: JENNIFER BERARD, CPCU, AND DONALD PATRICK ECKLER, ESQ. CYBER 4 SECURITY: In the wake of the 2008 financial (if that is the venue of the case), sional liability claims brought by RANSOMWARE crises there was a proliferation of and claims made poli- a or receiver of corporate entities. cies that often grant full prior because often the professional A C PRIVILEGE: 8 ATTORNEY Whether because of the number acts coverage for professional in some way was either 1) di- BILLS of filings, the depth of the crisis, such as lawyers, accountants, rectly involved in whatever ac- or a bolt of collective creativity, and brokers such that the insur- tivities that caused the entity to REAL ESTATE 9 the and receivers of ance carriers are extending col- fail or 2) should have discovered DUAL AGENCY these bankrupt entities sought out lectible coverage in these case. and advised the entity of the any potential source of recovery. Furthermore, any stigma or disin- problems that led to the entity’s FEATURED 10 Because they are insured, this centive in filing these claims demise. As brutal as this retro- INDUSTRY search often involved suits being against professionals, if it ever spectoscope can be in these MEMBER filed professionals for malpractice, existed, appears to have worn cases where the business has WEBSITE 10 particularly attorneys. Though the off, as these kinds of cases have obviously failed, all standard of ANALYTICS crisis has passed the number of become more the norm and are care defenses related to what bankruptcies has fallen, the fre- considered (by the experienced was known at the time, what quency with which such claims are Trustees who have pursued them the standards were in place at FEATURED 11 COMMITTEE being brought, relative to the before) as acceptable (or even the time and what the owners LEADERS number of bankruptcies, has not honorable) deployment of the and decision makers of the busi- necessarily seen a corresponding their fiduciary responsibilities. ness entity did with that same OUR 2017 2018 decrease. This article will discuss the peculi- information should be fully ex- MISSION LEVEL SPONSOR: A combination of factors has ar challenges of defending these plored, if necessary with experts helped produce a longer tail on cases and strategies to be em- in that field who can opine as to these type of cases, such as stat- ployed. what other professionals were ute of limitations discovery rules, Standard of Care doing in same or similar circum- Specifically Designed for Defense Firms | Available in 15 states procedural leniencies provided Standard of care can be a more stances. within the bankruptcy proceeding difficult battle ground in profes- SSPECIALP E C I A L PPOINTSO I N T S OFO F IINTEREST:N T E RES T : Continued on page 2 LETTER FROM THE PRESIDENT, BY: TIMOTHY J. GEPHART,  Annual Meeting Gold CPCU Sponsors—See Page 12 Planning for the 2017 Annual Topics specific to the areas of experts and attorneys well  See You in Chicago: Meeting and Seminar began in medical, legal, architects and versed in these practice areas. September 27-29, 2017 earnest immediately following engineers, and chiropractic pro- In addition to a tremendous the Denver meeting. This year’s fessional liability will be covered, amount of substance, we’ll also  Wrigley Field or Field meeting will be held at the Wes- along with more general topics have some fun. The Member Museum? tin River North in Chicago, Sep- of interest to us all, such as the Dinner (included in the registra- tember 27th through the 29th. use/misuse of social media, pro- tion fee) will be at the Kinzie  Watch for the Imminent The call for program proposals fessional liability risks arising Chophouse, one of the best, in Annual Meeting drew a tremendous response, from immigration issues, effec- my opinion, in the city. The Brochure Mailing! and this year’s programing will tive use of ADR and an innova- planning committee is working provide a wide range of informa- tive interactive program on pro- on a field trip for Thursday after tive sessions related to handling fessional liability claim trends. the sessions end. More on that the professional liability risks we The presenters include industry to come. And we’ll get together all deal with. Continued on page 4 PROFESSIONAL LIABILITY DEFENSE QUARTERLY Page 2

PROFESSIONAL DEFENSE IN BANKRUPTCY, CONT’ D

Standing cable when the plaintiff bears equal fault to, or more The trustee or receiver generally stands in the shoes fault than, the defendant for the alleged of the , as his successor in interest. As such, wrong.” Antioch Litigation Trust v. McDermott Will & standing is generally not going to be a viable defense Emery LLP, 738 F.Supp.2d 758, 772 (S.D.Ohio 2010). In but should be closely examined if the Trustee attempts this way the doctrine can be part of a comparative fault to boost or confuse the damage picture by asserting analysis. In pari delicto is founded upon public policy, losses from other adjacent businesses (which may not and does not depend upon the guilt or innocence of a be his purview, or may be too attenuated). In all cases, party. Commercial Nat'l v. Wheelock, 40 N.E. 636 the bankruptcy order that conveys upon the trustee or (1895). receiver his power should be requested and carefully Under Illinois law no distinction between the applica- reviewed for any restrictions related to time, or scope. tion of these doctrines in the context of a professional PLDF Eighth Annual Unclean Hands and In Pari Delicto malpractice action. Lurie v. Wolin, 2014 IL App (1st) Bankruptcy courts have repeatedly concluded that a 130661U, ¶¶ 1117. In Illinois, a claim for professional Meeting trustee in bankruptcy takes the debtor’s rights subject malpractice cannot be pursued when the plaintiff has Westin River North to all defenses and other burdens to which such rights placed himself in a questionable situation. Illinois Chicago, Illinois were subject immediately prior to the commencement courts have consistently found that the court is re- of the bankruptcy case. This “standing in the shoes of quired to leave the parties where it found them and September 2729, 2017 the debtor” principle becomes very important when provide no remedy when such parties are before them. considering important defenses such as in pari delicto/ In Makela v. Roach, 142 Ill. App. 3d 827, 832 (2nd Dist. unclean hands. 1986) the court held: Depending on the jurisdiction, these doctrines, which [w]here a party voluntarily elects to follow apply when both the plaintiff and defendant participate advice intended to extricate herself from a in a fraudulent, illegal, or inequitable conduct, may be questionable situation, she comes to his court interchangeable. They are often affirmative defenses with unclean hands and may not seek relief “[T]rustee in that must be pled. In some jurisdictions in pari delicto from her wrongful conduct through a legal applies to complaints at law, while unclean hands ap- malpractice action. ... We pass no judgment on bankruptcy takes plies to allegations seeking equitable relief. In such the advice given by the defendant, as a refusal jurisdictions unclean hands will likely not be available to aid [plaintiff] is a decision based on her the debtor’s rights in a professional malpractice claim. attempt to evade the law. subject to all In Ohio, which adheres to this majority position, the Likewise in Mettes v. Quinn, 89 Ill. App. 3d 77, 80 (3rd unclean hands defense is defined as a defense against Dist. 1980) the court held that “[i]t has been the policy defenses and other claims in equity. Rivers v. Otis Elevator, 996 N.E.2d of the courts to refuse their aid to anyone who seeks to 1039, 1047 (Ohio, 8th Dist.). The unclean hands de- found his cause of action upon an illegal or immoral act burdens to which fense requires a showing that the party seeking relief or transaction.” Illinois courts will not aid plaintiffs such rights were engaged in reprehensible conduct with respect to the who by their own acts create a situation and then seek subject matter of the action. State ex rel. Coughlin v. unethical or illegal behavior on behalf of a licensed subject … .” Summit County Bd. of Elections, 995 N.E.2d 1194, 1197 professional to extricate them. (2013). The doctrine of unclean hands considers More recently, in Peterson v. McGladrey LLP, 792 F.3d whether the party seeking relief has engaged in inequi- 785, 788789 (7th Cir. 2015), in which the trustees in table conduct that has harmed the party against whom bankruptcy for mismanaged a investment fund brought he seeks relief. DownieGombach v. Laurie, 41 N.E. 2d accounting malpractice claims against the outside audi- 858, 865 (2015). The doctrine of unclean hands tor, and the Court found that even though the auditor “precludes one who has defrauded his adversary in the committed a separate error, the fund manager’s own subject matter of the action from equitable relief.” In misconduct barred the claims under in pari delicto. re Dow, 132 B.R. 853, 860 (Bankr.S.D.Ohio 1991) (the The Court found no support for the argument of the doctrine of unclean hands does not apply where there trustee that the error of the professional must be the is no allegation that the plaintiffs defrauded the de- same as that of the client in order for in pari delicto to fendant). apply. Peterson, 792 F.3d at 787. With respect to in pari delicto the doctrine “refers to Irrespective of the manner in which these doctrines the plaintiff's participation in the same wrongdoing as are conceived in a given state, counsel for the defend- the defendant.” DownieGombach, 41 N.E. 2d at 865. ant professional should ascertain if there is a basis to The doctrine refers to equal fault, or equal culpability. claim that the plaintiff is at least in part culpable in Id. It is premised on the policy that “no Court will lend causing the injury claimed. its aid to a man who founds his cause of action upon an Causation immoral or illegal act.” Id. The “doctrine is only appli- As pointed out above, these entities are bankrupt or VOLUME 9, ISSUE 2 Page 3

PROFESSIONAL DEFENSE IN BANKRUPTCY, CONT’ D otherwise insolvent; getting a handle on the various shoes of the debtor at the time of the bankruptcy. (and often complex) causes for that situational and the Damages in professional negligence cases usually full time line of decision making that contributed to must be proved with “legal certainty” or “reasonable PLDQ’s Summer 2017 them, can be critical to asserting important defenses certainty” which is defined differently in different juris- Issue related to statute of limitations or scope of involve- dictions but most often means some reasonable space We encourage ment. Every demarcation in the professional’s involve- of time (e.g. 5 years for the “new business rule”) in ment, e.g. the timing of his various engagements and which empirical business data and facts support the member submission of the scope of those engagements, should be examined financial conclusions. Mere conclusions without sup- articles pertinent to closely alongside a broken down version of the damag- porting data, or rank speculation (e.g. about things professional liability claims es model to explore fully all causation angles. At its such as future profits) should not satisfy this proof , defense simplest, if it can be shown that the entity would have requirement. trial advocacy, or been bankrupt or insolvent irrespective of the conduct As an example in Meriturn Partners, LLC v. Banner & professional liability sub- of the professional, the plaintiff’s complaint, or key Witcoff, Ltd., 31 N.E.3d 451, 459460 (1st Dist. 2015) stantive law. The manu- parts of the damages, may be able to be defeated. This the court upheld a $6 million judgment (the amount of script deadline for the next is particularly true when the professional is an outsider the investment by the plaintiffs) but declined to award issue is: to the business and may not have directly participated lost profits as too speculative because of the new na- August 1, 2017. in whatever dismal decision making or market condi- ture of the business at issue. The Court applied the tions that contributed to the business’s demise. Miti- “new business” bar applied to “unestablished ventures, gation of damages defenses are often closely linked unestablished products and unestablished processes” with causation, of an existing business, not just to a new “business” Consider one illustrative example of the kind of case itself. Meriturn Partners, 31 N.E.3d at 459. For a full in which causation and unclean hands kinds of defens- exposition of Meriturn Partners, see “Just When You es can be found in a case stemming from a bankrupt Thought You Knew Who You Represented: A New Deci- “Trustees and business. Plaintiff was a business whose franchise sion May Upset the Law Regarding Attorney Liability to model to sell start up software and policies that would Third Parties,” IDC Quarterly, Vol. 26, No. 2, Donald receivers have a allow small and other financial institutions to sell Patrick Eckler, Matt Tibble, and Adam Carter, http:// insurance on the side. The business underwent an ini- www.pretzelstouffer.com/profiles/pdf/26.2.M1.pdf fiduciary tial honeymoon phase in the early 2000s, consistent Negotiation, Resolution, and the Fiduciary Dilemma responsibility to with the rising market then, but suffered serious de- Trustees and receivers have a fiduciary responsibility cline closely linked with the real estate market crash to recover as much money for the bankruptcy estate as recover as much and the disappearance of smaller lending institutions. reasonably possible; it is their obligation to the debtor Ultimately, the franchise company was subjected to and to the . Depending on the trustee and the money for the involuntary bankruptcy and its Trustee/Receiver, in an situation, this responsibility can produce inflexible or bankruptcy estate effort to increase the bankruptcy Estate, pursued even unfair dynamics when it comes time to try to claims against all of the professionals involved in any resolve the matter. Trustees often will not be shy about as reasonably aspect of the business. Various defendant professionals asserting their fiduciary duty and pragmatism as rea- were accused of failing to see and report the inevitable sons why negotiations should take place early in the possible … .” flaws in the business model itself and further accused case (before full discovery has taken place). A trustee of helping to sustain the unsustainable in a way that may then later utilize this same responsibility as an deepened the later . Despite the large dam- excuse for why she cannot possibly negotiate below a ages that stemmed from the demise of the company, certain amount. Counsel for the defendant should raise many different causation issues, comparative fault issues related to the costs and risk in the case, includ- angles and scope of representation defenses became ing serious dilemmas (for both sides) caused by dimin- apparent when a deep exploration of timeline of com- ishing limits policies. Reminding the trustee that she partmentalized legal work took place. must not only take into account whatever risk of losing Damages that exists in that particular case, but she must act Closely related to the causation issues are some im- more responsibly than perhaps the business entity portant damages defenses that should be considered in would have done before the insolvency her duty every complex or soft damages scenario. extends to achieving a reasonable result net of expens- do not happen all at once, they invariably happen over es, from her efforts. For example, spending $1 million time which allow for defenses (including statute of in fees and experts to prove a questionable liability limitations) based on that break down. Trustees in case that has a best day of $2 million in a situation bankruptcy should not be able to escape the empirical involved a diminishing limits $2 million policy is a pre- proof requirements for damages that exist in many carious scenario for a Trustee. The Trustee should be jurisdictions, because they, again, stand only in the reminded that she is most certainly not fulfilling her PROFESSIONAL LIABILITY DEFENSE QUARTERLY Page 4

PROFESSIONAL DEFENSE IN BANKRUPTCY, CONT’ D fiduciary duty if her inflexible negotiating produces a than the defense of other professional malpractice lengthy expensive litigation process, or an unfavorable actions. Conceding breach of the standard of care may or nonexistent net recovery. be an awkward position to take, but it is often the nec- Conclusion essary tact in such cases so that the defense of the case PLDF AND DIVERSITY The challenges of defending a case involving a bank- can focus on the other elements of the case where The Professional Liability rupt entity are unique and require a different approach successful defense is much more likely to be found. Defense Federation Jennifer Berard is a Director of Profes- Donald Patrick Eckler is a partner at Pretzel supports diversity in our sional Services Claims at CNA who manag- & Stouffer, Chartered, in Chicago. Pat member recruitment es litigation against lawyers, physicians, defends doctors, lawyers, architects, engi accountants and others. She is also an neers, appraisers, accountants, mortgage efforts, in our committee attorney licensed in Kansas and Missouri, brokers, insurance brokers, surveyors and and association and has achieved the CPCU designation. other professionals. He may be reached a deck- leadership positions, and in She may be reached at [email protected]. ler@pretzelstouffer.com. the choices of counsel, expert witnesses and medi- LETTER FROM THE PRESIDENT, CONT’ D ators involved in profes- sional liability claims. for the Welcome Party Wednesday evening on the Strong, active committees are at the heart of suc- Westin’s newly renovated outdoor bar. The Board has cessful organizations, and the PLDF is an excellent worked extremely hard to put together a program example of that premise. The programming for the with substance, entertainment, and a significant 2017 Annual Meeting and Seminar was driven by amount of time for networking. Please thank them committee proposals. Join a committee! It’s an ex- when you see them. cellent way to expand your universe of clients and In recent months, PLDF has also reached another defense lawyers. “In recent months, milestone. The organization now boasts over 500 I’m looking forward to seeing everyone in Septem- PLDF has also members. Thanks to all for promoting PLDF to your ber in Chicago. Registration materials will be out clients, colleagues, and defense lawyers. soon. Please feel free to contact me or any of your reached another I also encourage everyone to become familiar with Board members with questions about PLDF. and use the PLDF website (pldf.org). The website con- milestone. The Timothy J. Gephart, CPCU is President of tains a wealth of information and provides tools for organization now communicating with members. Remember, too, that PLDF and Vice President—Claims at Minne- PLDF can offer Amicus assistance for cases related to sota Lawyers Mutual Insurance Company. boasts over 500 the defense of professionals. PLDF has lent a hand in Tim may be reached at [email protected]. several successful appeals. members. ”

RANSOMWARE, BY: ANTHONY S. COTTONE, ESQ. AND CARRIE CAMPI, ESQ.

Perhaps the most prevalent and perplexing topics in of ransomware attacks which have resulted in the the rapidly growing field of cybersecurity is what is recovery of the businesses information without pay- known as “ransomware”. This article will address ing ransom, and a relatively minimal impact on the what ransomware is, illustrate its prevalence and business’ daily functioning. pervasiveness in today’s society, address some prop- We will also be providing some tips for appropriate er prebreach preparations, and evaluate the typical actions following a ransomware attack. As you will and sometimes conflicting responses and their im- see, acting swiftly and decisively in this confusing time pacts. is vitally important to both an effective and safe reso- We will not claim to be offering ironclad defenses lution. to ransomware attacks, as such things do not exist, What is Ransomware? and as all the research and estimations on the Ransomware is malware (malicious software) that is growth of attacks makes clear. What we can do in installed in a victim’s device or devices, such as com- this article is provide the general consensus of the puters, smartphones, tablets, and the like. The mal- best practices for consumers and businesses prior to ware can be downloaded through email attachments, any breach or ransomware attack. In presenting this an infected software download, visiting a malicious information, we will provide you with some examples website or clicking on a malicious link. The malware