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.
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