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Defending Bankruptcy Issues 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 insurance poli- a bankruptcy trustee or receiver bankruptcies 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 trustees 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- SPECIALS P 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 debtor, 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 Bank 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 130661-U, ¶¶ 11-17. 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 27-29, 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, 788-789 (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. Downie-Gombach 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).
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