Alcauter shows how Rule 137 sanctions lie where Rules of Professional Conduct ignored

This is the third (and last) post in a series. For part one, click here; for part two, scroll down or click here.

American Access Casualty Co. v. Alcauter, 2017 IL App (1st) 160775, is a (thankfully) rare case in which sanctions under Illinois Supreme Court Rule 137 were properly imposed and upheld on appeal. Alcauter also provides a good starting point for a discussion about the challenges faced by an insurer trying to defeat coverage on the grounds that its insured failed to cooperate. We’ve looked at the coverage issues in posts yesterday and the day before. Today, we finally get to the Rule 137 issue.

The operative language of Illinois Supreme Court Rule 137, for our purposes, is found in the fourth sentence of Rule 137(a):

The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion or other document; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good-faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

In our practice, attorneys are supposed to be the first and most important bulwark against frivolous or baseless litigation. Illinois courts are not expected to sniff out baseless lawsuits on their own; in fact, our judges are entitled to assume that no attorney would ever bring a case to court that was false or fraudulent or without merit.

This expectation is entirely consistent with Illinois Rule of Professional Conduct 3.3, a rule which imposes a duty of candor on an attorney representing a client before any tribunal. Under RPC 3.3(a)(1), a lawyer shall not “make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer.” Under Illinois Rule of Professional Conduct 1.2(d), with very limited exceptions, “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”

Comment 3 to Rule 3.3 provides expressly, “The obligation prescribed in Rule 1.2(d) not to counsel a client to commit or assist the client in committing a fraud applies in litigation.” And Comment 11 to Rule 1.2 warns, “When the client’s course of action has already begun and is continuing, the lawyer’s responsibility is especially delicate. The lawyer is required to avoid assisting the client, for example, by drafting or delivering documents that the lawyer knows are fraudulent or by suggesting how the wrongdoing might be concealed. A lawyer may not continue assisting a client in conduct that the lawyer originally supposed was legally proper but then discovers is criminal or fraudulent. The lawyer must, therefore, withdraw from the representation of the client in the matter. See Rule 1.16(a). In some cases, withdrawal alone might be insufficient....”

The Alcauter court does not mention the Rules of Professional Conduct in its opinion.

However, it is evident that, if AACC’s coverage counsel had adhered to these rules, he would never have been the object of a Rule 137 sanctions award.

You will recall that, in Alcauter, the trial court denied the insurer’s summary judgment motion (which depended on the alleged following of standard office procedures to prove notice to the insured) and set the case for trial. At the trial, the insurer repeated its presentation of office procedures, but Kimberly Krebs, the underlying plaintiff/judgment creditor, the party holding the $10,000 judgment that AACC’s coverage case sought to render worthless, put on evidence that Alcauter was in fact in prison on the day of the arbitration (on charges unrelated to the auto accident which was the subject of the underlying case). See, 2017 IL App (1st) 160775, ¶¶1, 18-21.

In finding that AACC owed coverage, the trial court admonished AACC and its counsel: “Nobody made a phone call. It’s outrageous to come in here and say you made a phone call on May 23rd.” (2017 IL App (1st) 160775, ¶22.)

AACC paid the judgment shortly thereafter. But Krebs filed a Rule 137 motion anyway. Keep in mind that, by this time, two years had elapsed since the arbitrators’ award.

In the 137 motion, Krebs contended that “AACC had failed to conduct a reasonable inquiry into Alcauter’s whereabouts because, if it had, it would have found out that he was incarcerated” and that coverage counsel had “falsely asserted that Alcauter had confirmed that he would attend the arbitration without conducting a reasonable inquiry into the basis for that claim” (2017 IL App (1st) 160775, ¶23).

But what really sunk AACC (and its coverage counsel – the trial court’s order imposed the sanctions on them both) was the April 9, 2015 letter that Krebs’ attorney sent to coverage counsel. “The letter listed the criminal case against Alcauter, including the case number. The letter also listed each of the exhibits that Krebs intended to introduce at trial, including the arrest report, prisoner data sheet, information, and IDOC documents” (2017 IL App (1st) 160775, ¶24). This letter was sent before trial, obviously, but after the summary judgment motion.

AACC and coverage counsel argued that this letter could not trigger 137 sanctions; the last pleading or motion that coverage counsel had signed on AACC’s behalf was, after all, the summary judgment motion (2017 IL App (1st) 160775, ¶41).

The Appellate Court rejected this interpretation of Rule 137 as “too narrow. The Illinois Supreme Court has stated that Rule 137 carries with it an implicit requirement ‘that an attorney promptly dismiss a lawsuit once it becomes evident that it is unfounded’” (2017 IL App (1st) 160775, ¶42, quoting Lake Environmental, Inc. v. Arnold, 2015 IL 118110, ¶13). At the very least, coverage counsel had an obligation to “forthrightly” advise the court once he learned of Alcauter’s incarceration. Instead, coverage counsel “filed a witness and exhibit list in anticipation of going to trial” and then “proceeded to put Krebs through the process of a bench trial on May 20, 2015, all the while knowing that he had no factual basis to support AACC’s position.” (2017 IL App (1st) 160775, ¶45.)

Coverage counsel did himself no favors by trying to fudge on when he received opposing counsel’s letter with the information regarding the incarceration of his insured – at one point saying he didn’t see the letter until “the eve of trial” and then backtracking to say that he’d not seen the letter until three or four weeks before trial (2017 IL App (1st) 160775, ¶28). Krebs’ attorney had the good sense to send the April 9 letter via certified mail – and had a green card proving delivery on April 13 (2017 IL App (1st) 160775, ¶27).

Nor did AACC or coverage counsel help their cause by offering to settle, after the April 9 letter was received, for the face amount of the arbitration award – $10,000. The 11th hour negotiations came to light at the hearing on the 137 motion. Before the coverage case went to trial, Krebs’ attorney offered to settle for $10,000 + costs + interest on the judgment. (2017 IL App (1st) 160775, ¶¶26, 28. After the trial, after sanctions were imposed, in addition to paying the judgment, costs of the original suit, and interest, AACC and its coverage counsel had to pay $12,678.75 in attorney fees and another $865.95 in costs (2017 IL App (1st) 160775, ¶29).

But, as shown, even though the Appellate Court never mentioned them by name, what really sank AACC and its coverage counsel in the Alcauterwas coverage counsel’s failure to follow the Rules of Professional Conduct. All this may be summarized as follows: Don’t file a baseless case – or if you do file a baseless case relying on what turns out to be the false representations of your client (or your client’s trial attorneys and staff) – withdraw the case. Recall—and abide by—the admonitions of Rule 1.2(d) and of Comment 11 to Rule 1.2.

The Alcauter case, continued: A detour for Direct Auto (why arbitrators' awards usually exceed trial results in arbitration cases)

This post is the second in a series of three. For part one, scroll down or click here.

We will, I promise, get to a discussion of why sanctions were imposed by the trial court and affirmed by the Appellate Court in American Access Casualty Co. v. Alcauter, 2017 IL App (1st) 160775. But I wanted to discuss insured non-cooperation cases generally first.

And, yesterday, we left off with the case of Direct Auto Ins. Co. v. Reed, 2017 IL App (1st) 162263. In Direct Auto, addressing a situation similar to Alcauter where the insured failed to show up for the arbitration and an order was subsequently entered barring the insured from rejecting the award, the Appellate Court expressly held, 2017 IL App (1st) 162263, ¶37, “substantial prejudice to an insurer does not automatically flow from the issuance of a debarring order preventing the insured from rejecting an unfavorable arbitration award.”

I left off with the suggestion that the Direct Auto court may have inadvertently confused matters when it added, 2017 IL App (1st) 162263, ¶38, “In so holding, we do not foreclose the possibility that an insurer might, under the circumstances of a particular case, be able to demonstrate actual, substantial prejudice from the issuance of a debarring order itself. But such a showing must be based on evidence that the insured would have obtained a better result at the trial than the insured obtained at arbitration.” In this installment, I submit that this showing may not be as difficult to make as this language might suggest.

In the Arbitration Reporter, the Law Bulletin Company “summarizes Cook County civil cases tried after the mandatory arbitration award was rejected.” In particular, this publication highlights, in each case, how the jury verdict differed from the arbitration award.

I am not a subscriber to that publication. But I do know that, at least at one time, defendants (meaning defendants’ insurers) typically did obtain better results at trial than at mandatory arbitration. The data, as compiled by the Arbitration Reporter, was brought up—pointedly—at a training seminar for Cook County arbitrators some years ago (I’ve been an arbitrator since the program started here). The presenters complained that the attorney-arbitrators were more generous to their colleagues in the plaintiffs’ bar than jurors drawn randomly from the voting rolls.

A lot of arbitrators, myself included, could agree that there was some anecdotal support for this contention: Arbitrators come from all areas of legal practice; some have never set foot in a courtroom. Attorneys with little or no courtroom experience were sometimes inclined to believe in the old ‘three-times-specials’ rule. Younger practitioners may have heard of this creature but liken it to a unicorn or dragon – mythical beasts that are wonderful to think about but which really never existed. Alas (or thankfully, depending on your background), the three-times-specials rule was more like the passenger pigeon or the dodo: It did exist once, but was hunted into extinction.

But the unwarranted generosity of some—a few—arbitrators was not the only, or even the major cause of the discrepancy. Rather, the difference in results is directly attributable to the differences in how medical damages evidence comes into the respective proceedings.

Illinois Supreme Court Rule 90(c) allows for the streamlined admission of medical records and bills at arbitration hearings; they merely have to be included in the 90(c) ‘package’ served on all counsel of record more than 30 days prior to the hearing. No doctor or other medical professional has to come in and explain or defend the records; the party offering the bills has only to specify whether they are, or are not, paid (paid bills carrying with them a legal presumption of reasonableness). Granted, the 2002 comments to Rule 90(c) do state, in pertinent part, “Regardless of the presumptive admissibility of the documents, the arbitrators will be required to apply the tests under established rules of evidence otherwise relating to admissibility and credibility and to determine, fairly, the weight to be given such evidence.” But, as a practical matter, in the typical arbitration case, there is not a lot of competing evidence or testimony to measure the bills and records against. In the ordinary arbitration case, the bills come in automatically and serve as the starting point for any award.

By contrast, at trial, a plaintiff has no such shortcuts available. As the Appellate Court explained recently in Klesowitch v. Smith, 2016 IL App (1st) 150414, ¶45, citing to both Arthur v. Catour, 216 Ill.2d 72 (2005), and Wills v. Foster, 229 Ill.2d 393 (2008), for support), in Illinois, “When evidence is admitted, through testimony or otherwise, that a medical bill was for treatment rendered and that the bill has been paid, the bill is prima facie reasonable. If the bill has not been paid, a plaintiff can establish reasonableness by introducing the testimony of a person having knowledge of the services rendered and the usual and customary charges for such services. Once the witness is shown to possess the requisite knowledge, the reasonableness requirement necessary for admission is satisfied if the witness testifies that the bills are fair and reasonable. The court in Wills did not overrule or abrogate Arthur, and under Arthur, when medical bills are discounted, a plaintiff cannot make a prima facie case of reasonableness based on the bill alone, because she cannot truthfully testify that the total billed amount has been paid. Instead, she must establish the reasonable cost by other means—just as she would have to do if the services had not yet been rendered, e.g., in the case of required future surgery, or if the bill remained unpaid” (internal citations and quotation marks omitted).

At trial, therefore, a doctor or other medical professional will have to testify in order for the medical bills to be admitted. If the medical professional can not also demonstrate that he or she “possessed knowledge of the usual and customary charges for” the services provided, any unpaid portion of the bills might not get in at all (2016 IL App (1st) 150414, ¶47). The necessity and efficacy of the treatment provided, the witness’s qualifications and training, his or her biases or prejudices, interests, the thoroughness of his or her examination, whether his or her findings were based solely on the plaintiff’s complaints or whether there was objective support for these findings – all of these will be fair game for cross examination of the medical professional.

Small wonder, then, that where testimony is required for the admission of medical bills instead of allowing them in automatically, plaintiffs’ awards might go down from the amounts awarded in arbitration.

In any event, to respond to the Direct Auto opinion, an insurer might be ‘actually and substantially prejudiced’ when its insured, after being duly noticed, fails to cooperate by appearing for arbitration because, in that case, the insurer will not be allowed to reject an arbitration award. Even where the insured has nothing particularly substantive (or helpful for the defense) to offer on liability (as in the case of a rear-end accident, for example), the inability to reject the award deprives the insurer of the opportunity to challenge, and perhaps reduce, plaintiff’s damages claim at trial. The difference between Rule 90(c) and the ordinary rules of evidence alone supports this argument. If the statistical pattern identified by the Arbitration Reporter some years ago still holds, this argument would be all the more compelling.

I would suggest that an insurer making this argument would be in a stronger position if it admitted liability, or at least admitted negligence, prior to the arbitration in the underlying case. An insurer later asserting the non-cooperation of its insured could point to that admission as evidence that its strategy was always to limit damages to an appropriate amount. The insured’s failure to appear for arbitration frustrates the implementation of this strategy if the insurer is prevented, on account of the insured’s failure to appear, from rejecting the arbitration award and proceeding to trial. Of course, in a case where liability is, or should be, admitted, defense counsel should seek to excuse the insured’s appearance at arbitration in advance, thereby preserving the insurer’s right to reject and avoiding any coverage inquiry.

In Alcauter, the issue of prejudice to the insurer was never reached; the case turned on whether the insured’s absence at the arbitration was really the result of his refusal to cooperate. A failure to cooperate should be established, in light of the insured’s contractual duties, by showing proof of notice to the insured, coupled with the fact of the insured’s nonattendance.

But, in Alcauter the insurer’s ‘proof’ of notice was entirely procedural. The same attorney whose affidavit had described the normal office procedures testified at trial. And, at trial, this attorney admitted that he had no personal recollection of this particular case (2017 IL App (1st) 160775, ¶14).

Meanwhile, the underlying plaintiff/judgment creditor put on proof that the insured could not have attended the arbitration even if he wanted to: Jose Alcauter was, at the time of the arbitration, in stir. In durance vile. Incarcerated.

This evidence called into question not only whether the insured was guilty of non-cooperation, it also raised doubts about whether the alleged office procedures had been followed. And, then, when the attorney for the underlying plaintiff/judgment creditor advised the court that proof of the insured’s incarceration had been bundled up and sent to the insurer’s coverage counsel before trial and coverage counsel proceeded to trial anyway without bringing that little factoid up in any way – well, that’s when we get, finally, to the Rule 137 discussion. That will be the subject of our next post.

Noncooperation defense, propriety of sanctions illustrated in Alcauter case

American Access Casualty Co. v. Alcauter, 2017 IL App (1st) 160775, provides a useful illustration of a case where sanctions under Illinois Supreme Court Rule 137 were properly imposed and upheld on appeal. Alcauter also provides a good starting point for a discussion about the challenges faced by an insurer trying to defeat coverage on the grounds that its insured failed to cooperate. We’ll start with the coverage issues in this post and finish tomorrow. The Rule 137 issue will be the subject of a third installment.

AACC alleged that its insured, Jose Alcauter, failed to cooperate in the defense of an auto accident suit brought against him by Kimberly Krebs. If the court agreed, AACC would be excused from paying Krebs for the judgment against Alcauter.

Krebs obtained a $10,000 arbitration award against Alcauter in May 2013, according to the Circuit Court Clerk’s electronic docket in case no. 2012 M2 2067. Alcauter did not appear for the arbitration, according to the Appellate Court’s opinion, the arbitrators noting “that ‘no evidence was presented’ at the hearing and that Alcauter did not appear ‘despite having received’” a Rule 237 notice to appear (2017 IL App (1st) 160775, ¶7). Although a notice of rejection was filed, in August 2013, judgment was eventually entered on the award.

A few months later, in October 2013, AACC filed the declaratory action that gives rise to the reported opinion. Alcauter’s failure to appear was touted as a violation of his contractual duty to cooperate in the defense of any case brought against him. Alcauter did not appear in the declaratory case and was defaulted (2017 IL App (1st) 160775, ¶9). This is not unusual (United Automobile Ins. Co. v. Buckley, 2011 IL App (1st) 103666, notwithstanding): The real party in interest in these cases is typically the underlying plaintiff/judgment creditor. The tortfeasor’s liability policy is the only likely source of funds to satisfy the judgment.

AACC moved for summary judgment. The centerpiece of coverage counsel’s motion was the affidavit of a supervising partner in the firm that AACC had retained as trial counsel. In the affidavit, the partner detailed his firm’s regular procedures for notifying insureds of upcoming trial or arbitration dates. Two letters would be sent to the insured’s last known address advising of his obligations; then, the day before the arbitration, a phone call was made to the insured’s last known telephone number. Moreover, the attorney attested, because there was no motion to continue the arbitration in the file, the file “showed that, ‘based upon [his firm’s] practice and procedures, [the firm] called Jose Alcauter the day before the arbitration and confirmed his attendance’” (2017 IL App (1st) 160775, ¶11). The trial court denied the summary judgment motion.

Understandably, given its focus on the Rule 137 sanctions subsequently imposed by the trial court, the Alcauter court does not go into detail as to why the trial court denied the summary judgment motion, noting only the trial court’s remark “that it still had ‘some unanswered questions * * * that raise issues of fact as to the notice,’” (2017 IL App (1st) 160775, ¶12).

However, the reported cases make it clear that non-cooperation is not an easy defense for an Illinois insurer to establish.

Illinois has long recognized that the “character” of an automobile insurance policy is different from other types of contracts. In M.F.A. Mutual Ins. Co. v. Cheek, 66 Ill.2d 492, 498 (1977), the Illinois Supreme Court noted that “the public is the beneficiary of the automobile policy.” According to the M.F.A. Mutual court, an automobile liability policy “is more than a private agreement between the insured and the insurer against losses sustained as a result of the negligent operation of a motor vehicle” (66 Ill.2d at 499-500). Quoting a Washington case with approval, the M.F.A. Mutual court added (66 Ill.2d at 500) that automobile liability policies “are simply unlike traditional contracts, i.e., they are not purely private affairs but abound with public policy considerations, one of which is that the risk-spreading theory of such policies should operate to afford to affected members of the public—frequently innocent third persons—the maximum protection possible consonant with fairness to the insurer.” See also, Central Mutual Ins. Co. v. Tracy’s Treasures, Inc., 2014 IL App (1st) 123339, ¶103 (quoting M.F.A. Mutual and differentiating “the character of the automobile insurance policy” from the policy at issue in that case).

On the other hand, cooperation clauses in insurance contracts serve a useful purpose by preventing “collusion between the insured and injured and [enabling] an insurer to prepare its defense to a claim,” American Access Casualty Co. v. Alassouli, 2015 IL App (1st) 141413, ¶17 (citing Cheek). “Typically an insurer has little to no knowledge of the relevant facts, and is therefore dependent upon its insured for fair and complete disclosure. * * * While an insured has no duty to assist an insurer in any effort to defeat a proper claim for recovery, the insured must disclose all facts within his knowledge and otherwise help the insurer determine coverage under the policy.” Founders Insurance Co. v. Shaikh, 405 Ill.App.3d 367, 374 (1st Dist. 2010), citing Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178, 204 (1991).

Thus, the Illinois courts have struck a balance between the private contractual purpose of the cooperation clause and the public nature of liability insurance policies (particularly auto liability policies) by holding that, in order to establish non-cooperation of its insured, an insurer must prove “a breach by the insured (i.e., a showing that the insurer ‘exercised a reasonable degree of diligence in seeking the insured’s participation’ and ‘the insured’s absence was due to a refusal to cooperate’) and resulting substantial prejudice to the insurer” (Direct Auto Ins. Co. v. Reed, 2017 IL App (1st) 162263, ¶25, quoting Shaikh, 405 Ill.App.3d at 374). And in Direct Auto, addressing a situation similar to Alcauter where the insured failed to show up for the arbitration and an order was subsequently entered barring the insured from rejecting the award, the Appellate Court expressly held, 2017 IL App (1st) 162263, ¶37, “substantial prejudice to an insurer does not automatically flow from the issuance of a debarring order preventing the insured from rejecting an unfavorable arbitration award.”

The Direct Auto court attempted to explain that it was not saying that an insurer is never prejudiced by the failure of its insured to attend a mandatory arbitration hearing... but, in all honesty, the court injected some presumably unintended confusion when it added, 2017 IL App (1st) 162263, ¶38, “In so holding, we do not foreclose the possibility that an insurer might, under the circumstances of a particular case, be able to demonstrate actual, substantial prejudice from the issuance of a debarring order itself. But such a showing must be based on evidence that the insured would have obtained a better result at the trial than the insured obtained at arbitration.”

Addressing that potential confusion – and, in the course of same, addressing when and how an insurer is prejudiced by the failure of a non-cooperative insured to appear for a mandatory arbitration hearing – will be the subject of tomorrow’s post.