Long-established law holds that when a corporation declines to bring a claim for damages, under certain circumstances shareholders can force the issue by bringing a derivative claim in the name of the corporation. But may the shareholders – in their individual capacities – sue the counsel they retain to prosecute the derivative claim for malpractice? In Stevens v. McGuireWoods LLP, a unanimous Illinois Supreme Court held that the answer was “no.” Our detailed summary of the facts and lower court decisions in Stevens is here. Our report on the oral argument is here.

Stevens began when minority shareholders hired the defendant law firm to bring certain claims against a corporation’s managers and its owner and majority shareholder for misappropriation of intellectual property. The shareholders alleged damages both in their individual capacities and derivatively for the corporation. In 2008, the trial court tossed all the claims against the managers and three of nine claims against the majority shareholder. The plaintiffs then retained new counsel and filed an amended complaint, bringing various claims against the law firm which represented the corporation. The court dismissed all claims against the law firm, finding that all were time-barred, and the plaintiffs’ individual claims against the law firm failed for lack of standing. Not long after, the plaintiffs relinquished their ownership interest in the corporation.

The plaintiffs then filed a one-count complaint against the law firm which had represented them in the earlier suit, alleging that the firm had failed to timely assert the claims against the corporation’s lawyers, ultimately leading to the plaintiffs having to settle for much less than the claim was worth. The trial court dismissed the plaintiffs’ claims, holding that even if the defendant’s representation had been somehow negligent, the plaintiffs could not have been harmed, since even timely brought claims by the shareholders against the corporate counsel would necessarily have been dismissed for lack of standing. The Appellate Court affirmed with respect to the plaintiffs’ individual claims, but reversed with respect to the plaintiffs’ derivative claims.

In an opinion by Justice Thomas, the Supreme Court reversed. The problem, the Court found, was that while the plaintiffs were suing the defendant law firm in their individual capacities, there was no way they could ever have recovered damages in their individual capacities. They had no standing to sue the corporation’s counsel on their own, and even if they’d succeeded in a derivative claim, they wouldn’t have benefited, so any alleged negligence by the defendant cost the plaintiffs nothing. According to long-settled law (both pursuant to common law and the Limited Liability Company Act), any derivative recovery went entirely to the corporation. And even if the plaintiffs’ share price would have been indirectly affected by a successful suit, that wasn’t anything they could ever recover in the derivative action.

The plaintiffs cited Brown v. DeYoung, an 1897 Illinois Supreme Court case, for the proposition that the trial court would have had an equitable right to direct any derivative recovery to the shareholders rather than to the corporation. The Court held that the plaintiffs were wrong for a couple of reasons. First, Brown wasn’t a derivate suit. Second, even if Brown had held that courts could direct a derivative recovery to shareholders, it had been overruled subsequently by the Limited Liability Company Act.

The plaintiffs argued that a holding in the defendant’s favor would essentially immunize counsel in derivative actions from malpractice suits, but the Court pointed out that that wasn’t true. First, the company could sue; second, the current minority shareholders could sue; and third, if the plaintiffs themselves hadn’t sold all their stock, they could have filed a derivative malpractice claim.

Image courtesy of Flickr by William Creswell (no changes).