John Nachtrieb, Beverly Nachtrieb, & Fotel, Inc. v. Law Offices of James M. Kelly, P.C.

2017 IL App (2d) 160984-U

JOHN NACHTRIEB, BEVERLY NACHTRIEB,and FOTEL, INC., Plaintiffs-Appellants, v. LAW OFFICES OF JAMES M. KELLY, P.C.,and JAMES M. KELLY, Defendants-Appellees.

No. 2-16-0984

APPELLATE COURT OF ILLINOIS SECOND DISTRICT

August 10, 2017

NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from the Circuit Court of Kane County.

No. 15-L-204

Honorable Edward C. Schreiber, Judge, Presiding.

JUSTICE BURKE delivered the judgment of the court.

Justices Hutchinson and Spence concurred in the judgment.

ORDER

¶ 1 Held: We find that, once plaintiffs filed for bankruptcy protection, they lacked standing to bring any insurance claims against their insurer or broker, and since they lacked standing to pursue those claims, they cannot prove that defendants' legal malpractice proximately caused them to lose those claims. Therefore, the trial court properly granted defendants' section 2-619 motion to dismiss; affirm.

¶ 2 Plaintiffs, John Nachtrieb, Beverly Nachtrieb, and Fotel, Inc., filed a legal malpractice complaint against their bankruptcy attorneys, defendants, Law Offices of James M. Kelly, P.C., and James M. Kelly. The trial court granted defendants' motion to dismiss brought pursuant to section 2-619 of the Code of Civil Procedure (Code) (735 ILCS 5/2-619 (West 2014). We affirm.

¶ 3 I. BACKGROUND

¶ 4 John Nachtrieb owned a small business, Fotel, Inc., and Beverly Nachtrieb owned property in Lombard, Illinois, where Fotel operated its business. Beverly rented the remaining commercial space to various commercial tenants.

¶ 5 In July 2010, Beverly's property suffered a serious flood, causing significant damage. Following the flood, plaintiffs made a claim to their insurance carrier, Hartford Casualty Insurance. On August 3, 2010, Hartford denied coverage for the flooding damage. Plaintiffs specifically alleged that Hartford's denial of insurance coverage caused them to file for bankruptcy, as plaintiffs "lost their family business and the commercial property owned by Beverly Nachtrieb was destroyed."

¶ 6 Plaintiffs retained Kelly to file their bankruptcy petitions. With his assistance, plaintiffs filed for Chapter 7 bankruptcy protection on February 5, 2011, for Fotel, and on May 3, 2011, for John and Beverly. John and Beverly were discharged as debtors on November 2, 2011, and Fotel was discharged on October 3, 2012. Plaintiffs were ultimately successful in discharging about $1 million worth of personal and business debt through the Chapter 7 bankruptcy proceedings.

¶ 7 After plaintiffs bankruptcy case concluded, plaintiffs sued Hartford and plaintiffs' insurance broker, Lamb, Little, Inc., and a third party. This case was dismissed. Defendants point out that this case was not dismissed on res judicata grounds for failure to include the claim in the bankruptcy petition, as plaintiffs have stated in their allegations and in their appellate brief. Rather, as shown by the record, the trial court dismissed the claim against Lamb, Little based onthe statute of limitations, and the claim against Hartford was voluntarily dismissed with prejudice by agreement.

¶ 8 Plaintiffs subsequently filed the present legal malpractice case against defendants for failing to include contingent claims against Hartford and Lamb, Little in plaintiffs' Schedule B bankruptcy disclosure petition. Specifically, plaintiffs alleged that, following Hartford's denial of their insurance claim, they had two contingent claims that were diametrically opposed to one another: (1) a claim against Hartford for wrongful denial of insurance coverage; and (2) a claim against their insurance broker, Lamb, Little, for errors and omissions in securing the insurance policy issued by Hartford. Plaintiffs alleged that these two contingent claims should have been included on the Schedule B bankruptcy disclosure petition and, because they were not included, defendants committed legal malpractice and caused them to suffer damages.

¶ 9 On September 9, 2016, defendants filed a section 2-619 motion to dismiss the second-amended complaint. In their motion, defendants maintained that plaintiffs could not establish the proximate cause element to sustain plaintiffs' cause of action based on the following. Once plaintiffs filed for bankruptcy protection, they lost standing to pursue any insurance claims against Hartford or Lamb, Little because upon filing, any such claims became part of the bankruptcy estate. Plaintiffs could not prove they could have recovered in any claim against Harford or Lamb, Little since the right to any such claims was already lost to them by filing for bankruptcy. And, by exchanging their prospective right to sue their insurer and broker for bankruptcy protection, plaintiffs cannot prove that they were damaged by defendants' alleged negligence for failing to include those insurance claims in plaintiffs' bankruptcy disclosure petition. The trial court agreed and granted defendants' section 2-619 motion to dismiss. Plaintiffs timely appeal.

¶ 10 II. ANALYSIS

¶ 11 Plaintiffs contend that the trial court erred by granting defendants' section 2-619 motion to dismiss. "A motion to dismiss, pursuant to section 2-619 of the Code, admits the legal sufficiency of the plaintiffs' complaint, but asserts an affirmative defense or other matter that avoids or defeats the plaintiffs' claim." DeLuna v. Burciaga, 223 Ill. 2d 49, 59 (2006); Solaia Technology, LLC v. Specialty Publishing Co., 221 Ill. 2d 558, 579 (2006). For a section 2-619 dismissal, our standard of review is de novo.¹

¶ 12 To prove legal malpractice, the plaintiff-client must plead and prove that the defendant-attorney owed the client a duty of due care arising from the attorney-client relationship, that the defendant breached that duty, and that as a proximate result, the client suffered an injury. Northern Illinois Emergency Physicians v. Landau, Omahana & Kopka, Ltd., 216 Ill. 2d 294, 306 (2005) (citing Sexton v. Smith, 112 Ill. 2d 187, 193 (1986)). "Even if negligence on the part of the attorney is established, no action will be against the attorney unless that negligence proximately caused damage to the client." Northern Illinois Emergency Physicians, 216 Ill. 2d at 306-07.

¶ 13 Where the alleged legal malpractice involves litigation, no actionable malpractice claim exists unless the attorney's negligence resulted in the loss of an underlying cause of action. Governmental Interinsurance Exchange v. Judge, 221 Ill. 2d 195, 200 (2006). If the underlying action never reached trial because of the attorney's negligence, the plaintiff is required to prove that but for the attorney's negligence, the plaintiff would have been successful in that underlying action. Id.¶ 14 The basis of this legal malpractice suit is predicated upon fundamental bankruptcy law and principles. The act of filing a petition for relief under the Bankruptcy Code commences a bankruptcy case and creates an estate in bankruptcy. See 11 U.S.C. §§301, 541. Upon commencement of the case, a debtor's interests in property vest in the bankruptcy estate, and the debtor surrenders the right to control estate property. Property of the estate falls under the exclusive jurisdiction of the bankruptcy court. See 28 U.S.C. §1334(e). Since property of the estate is now in custodia legis, it is administered exclusively by a specifically designated fiduciary, a trustee. See, e.g., 11 U.S.C. §§ 323(a), 363, and 704.

¶ 15 Pre-bankruptcy claims are part of the debtors' estates and belong to the bankruptcy trustees, for the benefit of the debtors' creditors. Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006). A debtor's bankruptcy estate includes claims and causes of action that belonged to the debtor on the petition date. Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006); Cable v. Ivy Tech State College, 200 F.3d 467, 472-73 (7th Cir. 1999). Thus, a legal claim arising out of events occurring before a debtor's bankruptcy filings belongs to the debtor's estate. In re Polis, 217 F.3d 899, 901-02 (7th Cir. 2000).

¶ 16 These principles apply regardless of whether the bankruptcy petitioner has scheduled the property or assets. Dailey v. Smith, 292 Ill. App. 3d 22, 25 (1997). "[T]he failure to schedule a claim in bankruptcy (as well as the reasons for such failure) can have no relevance to the bankrupt's standing to bring a subsequent claim." Id. at 26. Once the petition is filed, all claims belong to the estate, and the bankruptcy trustee alone has standing to pursue them. Id. If a legal claim is not scheduled or otherwise administered by the time the bankruptcy is closed, it forever remains property of the estate, and the trustee remains the real party in interest. 11 U.S.C. §554(d).

¶ 17 Once a debtor files for bankruptcy, any unliquidated lawsuits become part of the bankruptcy estate, and a debtor is divested of standing to pursue them upon filing his or her petition. Dailey, 292 Ill. App. 3d at 25. Because the non-disclosed claim does not belong to the debtor, the debtor "cannot pursue it in litigation." Biesek, 440 F.3d at 414. A trustee's statutory right to exclusivity ceases once the property has been abandoned. See Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006) (if estate, through trustee, abandons a cause of action, then creditors no longer have an interest, and claim reverts to debtor's hands); 11 U.S.C. §554. Absent abandonment, a debtor cannot pursue a cause of action for his or her own benefit. In re Enyedi, 371 B.R. 327, 333 (N.D. Ill. 2007).

¶ 18 Plaintiffs' argument focuses on standing to bring the malpractice action when the issue, as is evident by their pleading, is standing to bring the insurance claims. It is clear that, once the bankruptcy petition was filed, any insurance claims belonged to the bankruptcy trustee. This means that any potential claims against Hartford or Lamb, Little...