Opinion ID: 3187214
Heading Depth: 2
Heading Rank: 2

Heading: The Arbitration Demand by the Class Members

Text: In January 2011 Walter Duemer, a plaintiff in the securities-fraud class action, filed a demand for arbitration against the Joyce firm on behalf of roughly 90% of his fellow plaintiffs. He alleged claims for breach of fiduciary duty, wrongful conversion of client trust funds, and breach of contract. The claims centered on the Joyce firm’s retention of the No. 14-3341 5 Morgan Lewis and Reed Smith firms to handle the satellite litigation against EPS’s insurers. 2 The Joyce firm denied any wrongdoing and retained counsel to defend it in the arbitration, forwarding counsel’s invoices to Professional Direct for payment. The insurer agreed to pay for the firm’s defense under a reservation of rights and paid the invoices as they were submitted. (There were two exceptions, which we’ll discuss later.) The arbitrator rejected the conversion and breach-ofcontract claims but found the Joyce firm liable for breach of fiduciary duty in the manner in which it had arranged for the two outside firms to handle the satellite litigation. More specifically, the arbitrator found that the Joyce firm did not make “up front full disclosure about the change in legal representation” and that the new fee arrangement “was presented [to the clients] as already accomplished,” suggesting “an element of undue influence about the purported negotiation of a new fee agreement.” As a remedy, the arbitrator sought to unwind some of the additional attorney’s fees incurred by the Duemer claimants in the satellite litigation. The arbitrator ordered the Joyce firm to remit the $405,674.87 in fees it had charged for consultative work with Morgan Lewis and Reed Smith. And because the original retainer agreement had called for a 75/25 client/attorney split of any recovery yet the clients had footed the entire bill for the satellite litigation, the arbitrator 2 The arbitration demand also challenged the acceptance of a settlement offer of $8.6 million—$400,000 below the $9 million threshold authorized by the plaintiffs. This claim was not part of the arbitrator’s final award and is immaterial to this appeal. 6 No. 14-3341 also ordered the Joyce firm to pay 25% of the fees charged by Morgan Lewis and Reed Smith. This added $150,127.15 to the award. Finally, the arbitrator ordered the firm to pay $72,725.45 to offset the costs incurred in the arbitration. The Joyce firm unsuccessfully challenged the arbitration award in Illinois state court on grounds unrelated to this appeal. The firm was thus on the hook for $628,527.47. At this point Professionals Direct balked and refused to pay the award, relying on exclusions (o) and (p) in the policy (among other policy defenses). The Joyce firm filed suit in state court seeking a declaration that the insurer had breached its duty to indemnify. Professionals Direct removed the action to federal court based on diversity jurisdiction. See 28 U.S.C. § 1332. On cross-motions for summary judgment, the district court honed in on the arbitrator’s use of the word “sanction” to describe the final award against the Joyce firm. Since “claims for … sanctions” are expressly excluded from coverage under exclusion (o) of the policy, the judge held that the insurer owed no indemnification duty and entered summary judgment for Professionals Direct. This appeal by the Joyce firm followed.