David Grochocinski v. Mayer Brown Rowe & Maw, LLP

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 10-2057, 11-1393 & 11-3597

D AVID E. G ROCHOCINSKI, not individually,

but solely in his capacity as the Chapter 7 Trustee

for the bankruptcy estate of CMGT, INC.,

Plaintiff-Appellant/Cross-Appellee,

and

E DWARD T. JOYCE AND A SSOCIATES,

Cross-Appellee,

and

A PPEAL OF:

R. G ERARD S PEHAR, Movant,

Appellant,

v.

M AYER B ROWN R OWE & M AW, LLP, et al.,

Defendants-Appellees/Cross-Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 1:06-cv-05486—Virginia M. Kendall, Judge.

2 Nos. 10-2057, 11-1393 & 11-3597

A RGUED JANUARY 16, 2013—D ECIDED JUNE 21, 2013

Before B AUER and H AMILTON, Circuit Judges, and

M ILLER, District Judge. Œ

H AMILTON, Circuit Judge. The story of Rumpelstiltskin

is about turning straw into gold. The legal malpractice

case at the heart of these appeals presents a modern

attempt to turn metaphorical straw into real gold. The

district court rejected the effort, as do we.

This case originated in a contract dispute between

CMGT, Inc. and Spehar Capital, a company CMGT hired

to help it find financing. Spehar Capital sued CMGT over

a dispute related to this agreement and eventually pro-

cured a $17 million default judgment against CMGT,

which had no assets to pay it. Spehar Capital devised a

plan to recover on the judgment. Step one: force CMGT

into bankruptcy. Step two: convince the bankruptcy trustee

to bring a malpractice action against CMGT’s law firm

based on the theory that but for the law firm’s negligence,

Spehar Capital would never have obtained the default

judgment. Step three: win the malpractice action or force

a settlement for the nominal benefit of CMGT’s bank-

ruptcy estate. Step four: since Spehar Capital’s claim on

the bankruptcy estate dwarfs all others, Spehar Capital

Œ

The Honorable Robert L. Miller, Jr., of the Northern District

of Indiana, sitting by designation.

Nos. 10-2057, 11-1393 & 11-3597 3

receives the lion’s share of the payment to the bank-

ruptcy estate. Result: Spehar Capital receives payment

on the default judgment by convincing another court

that the default judgment should never have been en-

tered. A meritless default judgment would be trans-

formed into a significant payout. Straw turns into gold.

We are now at step two. The bankruptcy trustee sued

CMGT’s law firm, known as Mayer Brown, the de-

fendant here. The trustee claimed that Mayer Brown

committed malpractice by failing to advise CMGT on the

consequences of not settling its dispute with Spehar

Capital and by failing to defend CMGT against Spehar

Capital’s suit. Mayer Brown moved to dismiss, arguing

in part that this suit should be dismissed as a fraud on

the court due to the inconsistency between the theory of

the malpractice case and a recovery by Spehar Capital.

The district court denied the motion to dismiss but

granted discovery for the limited purpose of investigating

the fraud on the court theory. Mayer Brown then moved

for summary judgment, and the district court granted

the motion, reasoning that the doctrine of judicial

estoppel barred the inconsistencies in this suit, based on

undisputed facts. We agree. If the trustee were to prevail

in this suit, there would be a clear impression that one

court was misled. In the related appeals, we affirm the

denial of Gerard Spehar’s motion for intervention and

the denial of defendant Mayer Brown’s motion for sanc-

tions against plaintiff’s counsel and the trustee.

4 Nos. 10-2057, 11-1393 & 11-3597

I. Factual Background

A. CMGT

CMGT was formed in 1999 to provide management

services to the health care industry. CMGT owned soft-

ware that made it easier for companies to track em-

ployee absences. While CMGT appears to have had a

promising business idea, it lacked the start-up capital

needed to implement its plan on the desired scale.

CMGT agreed to have Ronald Given, a partner with

Mayer Brown, guide it through the process of obtaining

financing.1 The engagement letter provided that Mayer

Brown would provide services “in connection with

[CMGT’s] initial capitalization, formative acquisition

activities, and other related general corporate activities.”

In exchange, CMGT agreed to pay Mayer Brown 1.5 times

the firm’s normal hourly rates, but would owe nothing

unless and until CMGT secured over $1 million in fi-

nancing. Mayer Brown also retained the right to ter-

minate the agreement if unpaid legal fees exceeded

$50,000 or if CMGT did not secure financing by May 2000.

May 2000 came and went without financing, but Mayer

Brown continued to provide legal services with the

hope that financing would materialize.

In June 2001, CMGT also hired Spehar Capital to assist

in the search for investors. Spehar Capital pairs com-

1

Mayer Brown and Ronald Given are both defendants in this

action. Because the resolution of the issues in this appeal is

the same for both defendants, we refer to them collectively

as “Mayer Brown.”

Nos. 10-2057, 11-1393 & 11-3597 5

panies seeking investors with venture capitalists seeking

investments. For this service, Spehar Capital receives

a finder’s fee. Its founder is Gerard Spehar. The agree-

ment between CMGT and Spehar Capital, as amended

on September 30, 2002, provided that Spehar Capital

would receive a success fee “immediately at the suc-

cessful closing of a funding” with a firm introduced to

CMGT by Spehar Capital or with whom CMGT approved

Spehar Capital to hold discussions. The firms that met

these conditions were identified in an Exhibit A that

was attached to the contract and could be “amended only

by written addendum.” Upon the closing of such a deal,

CMGT was to pay Spehar Capital six percent of the

capital raised. Spehar Capital was also to receive six

percent of CMGT’s common stock “[a]t such time

as CMGT receives and accepts a Term Sheet or other

commitment from an investor(s) for a minimum of

$1,000,000,” and Spehar Capital was to have exclusive

investment banking rights. In addition, after the closing

of a successful financing transaction, Spehar Capital was

to receive a total of $100,000 in consulting fees spread

over twelve consecutive months.

B. The Trautner Deal

In 2003, CMGT still needed an investor. In July 2003, a

CMGT shareholder named Charles Trautner proposed

solving CMGT’s financial woes with what we will call

the “Trautner deal.” He proposed a spinoff transac-

tion in which his investment group would form a new

corporation that would purchase CMGT’s assets for either

6 Nos. 10-2057, 11-1393 & 11-3597

$500,000 or 20 percent of the new corporation’s stock. To

make the two options equivalent from the perspective

of CMGT’s shareholders, the new corporation would

receive an initial capitalization of at least $2.5 million.

CMGT’s president, Lou Franco, signed a non-binding

letter of intent with Trautner on August 1, 2003, and

CMGT’s shareholders then approved the deal on

August 22, 2003. The Trautner deal was scheduled to

close by September 30, 2003.

But a dispute with Spehar Capital derailed the Trautner

deal, and that dispute spawned the malpractice action

now before us. The Trautner deal did not provide for

any payment to Spehar Capital. CMGT, with the advice

of Mayer Brown, had concluded that the deal was

outside the scope of its contract with Spehar Capital.

According to CMGT, because the deal was arranged

through channels independent of Spehar Capital and

because Trautner was not included in Exhibit A, Spehar

Capital was not entitled to any payment. Spehar Capital,

however, maintained that it was entitled to payment.

Spehar Capital alleged that CMGT asked Spehar to par-

ticipate in conversations about the deal with Trautner

and that CMGT unreasonably refused to add Trautner

to the list on Exhibit A after Spehar Capital found out

about the proposed Trautner deal on August 8, 2003.

Over the next month, Spehar Capital and CMGT were

unable to reach any resolution, though the extent to

which they engaged in settlement negotiations is dis-

puted. Mayer Brown contends it is absurd to suggest

CMGT could settle because CMGT had no money with

Nos. 10-2057, 11-1393 & 11-3597 7

which to settle or even to defend the litigation. The

trustee contends that Spehar Capital wanted to settle

and that CMGT could have offered to settle with a per-

centage of future financing proceeds.

The trustee also contends that Mayer Brown negli-

gently failed to advise CMGT about the risk of not

settling for the future of CMGT. As an example of this

failure, the trustee points to an August 26, 2003 email

in which the president of CMGT, based on advice from

Mayer Brown, sent a letter to the shareholders conveying

confidence that “any claims against the transaction will

not succeed and, as a practical matter, the only substan-

tive effect we will be facing is additional documenta-

tion complexity and a delay in the winding up of

CMGT . . . .”

According to the trustee, Mayer Brown failed to

provide adequate advice to CMGT because the law firm

had negotiated a “functionally equivalent” deal with

Trautner that would have allowed Trautner essentially

to assume CMGT’s business without formally pur-

chasing CMGT’s assets from its shareholders. This alter-

native deal envisioned assigning CMGT’s existing con-

tracts to the new company formed by Trautner. CMGT

would pay the new company for servicing CMGT’s

contracts, including its accrued legal fees owed to

Mayer Brown, which would be paid on CMGT’s behalf.

In effect the deal would have given Trautner the benefit

of the Trautner deal and Mayer Brown would have re-

ceived payment of its fees without having to worry

about Spehar Capital’s claim. According to the trustee,

8 Nos. 10-2057, 11-1393 & 11-3597

however, this alternative deal was not in the interest

of CMGT or its shareholders because CMGT would lose

all of its revenue stream — the contracts that would

be serviced by the new corporation.

C. The California Suit

On September 9, 2003, Spehar Capital followed through

with its threat to sue, filing a complaint in a California

state court. We refer to this action as “the California

suit.” On September 12, the California court granted an

ex parte temporary restraining order enjoining CMGT

from closing the Trautner deal or any other deal whose

terms did not comply with the CMGT-Spehar Capital

agreement. Attorney Given of Mayer Brown forwarded

the order to CMGT’s president and shareholders. He

informed them of the order and reminded them that

Mayer Brown had not been retained to defend CMGT in

the California suit. Given later told the shareholders

that CMGT did not have money to contest the law-

suit and that CMGT could “no longer act on [the share-

holders’] behalf to protect [their] interests from Gerry

Spehar.” This email, however, also provided advice on

the merits of the California suit and invited CMGT’s

shareholders and chief operating officer to contact

Mayer Brown with any questions about the lawsuit. On

October 3, the temporary restraining order was con-

verted into a preliminary injunction. CMGT never ap-

peared to defend the suit, nor did any CMGT shareholder.

In November 2003, Spehar Capital amended its com-

plaint in the California suit to include a claim for dam-

Nos. 10-2057, 11-1393 & 11-3597 9

ages. CMGT still did not appear, and the California

court entered a default judgment in favor of Spehar

Capital for $17,045,780 on March 18, 2004. This repre-

sented legal expenses, the $150,000 success fee, and the

$100,000 management consulting fee that Spehar

Capital claimed it should receive if it assisted with the

successful closing of a financing deal. The vast bulk

of the judgment was based on supposed values of

$11,253,627 in stock compensation and $5,483,290 for

the lost exclusive investment banking rights. The values

of the stock compensation and investment banking

rights were calculated based on the projected value of

a speculative planned initial public offering in 2006 — a

figure Spehar obtained from CMGT’s promotional mate-

rials from several years earlier. At the prove-up hearing

in California, Spehar testified to all of these damages.

This state court judgment is not subject to collateral

attack in these proceedings. We are nevertheless troubled

by aspects of the judgment that are relevant to our

case. First, there was considerable tension between the

injunctive relief and the damage award. The damage

award rests on the premise that the Trautner deal

would have closed. Recall, though, that the same court’s

injunction — issued ex parte at Spehar Capital’s behest

on claims of irreparable harm — enjoined the closing of

the same Trautner deal, thus prohibiting CMGT from

receiving the very funding that Spehar Capital claimed

it had helped secure. Second, the valuation of the

stock options and the investment banking rights based

on a speculative IPO three years in the future is extra-

ordinary, to put it mildly. At the time Spehar Capital

10 Nos. 10-2057, 11-1393 & 11-3597

sought the default judgment, CMGT was valued in the

red. It had just agreed to a deal in which it would sell

its assets (without the liabilities) for a grand total of

just $500,000. Yet according to Spehar Capital and the

California court that entered the default judgment, the

real value of CMGT was more than $180 million. This

assumed that the tiny new company would have

enjoyed truly meteoric success. Perhaps this is why the

California judge said, upon entering the judgment, that

he doubted Spehar Capital would ever collect because

CMGT would “set [the Default Judgment] aside, walk

away from the company or they will go bankrupt.” In

other words, the judge who made the damages findings

did not expect the judgment would ever be collected.

The judge was right, but may have underestimated

Spehar Capital’s creativity. The last of his predictions

proved true. CMGT never paid the default judgment, and

Spehar Capital forced CMGT into bankruptcy, filing an

involuntary bankruptcy petition on August 25, 2004. On

September 21, 2004, David Grochocinski was appointed

to serve as the trustee. He did not move to vacate the

default judgment before the time to do so expired under

California law. This brings us to the present litigation.2

2

It is disputed whether the trustee could have successfully

vacated the default judgment. Under California law, a party

may move to vacate a default judgment within six months of

the entry of the judgment. Cal. Civ. Proc. Code § 473(b). The

motion must be accompanied by a copy of the proposed

answer. Relief from judgment is at the court’s discretion

(continued...)

Nos. 10-2057, 11-1393 & 11-3597 11

D. The Present Dispute

Shortly after Grochocinski was appointed trustee of

CMGT’s estate, Spehar Capital approached him about

bringing a malpractice action against CMGT’s attorneys,

Given and the Mayer Brown firm. The bankrupt CMGT

had essentially no assets, so Spehar Capital’s only hope

for recovering on the default judgment in the California

suit was to convince the trustee to sue CMGT’s lawyers

for malpractice. Since the CMGT estate had no money

to fund litigation, the trustee was unwilling to invest in

litigation on behalf of the no-asset estate that would

benefit only a single secured creditor — Spehar Capital.

The trustee nevertheless encouraged Spehar to hire

counsel to investigate whether a malpractice claim would

be viable.

Eventually, Spehar Capital and the trustee entered

into a post-petition financing agreement to help fund the

investigation into the malpractice action and to ensure

(...continued)

unless the application for relief is “accompanied by an at-

torney’s sworn affidavit attesting to his or her mistake, inad-

vertence, surprise, or neglect,” in which case the judg-

ment must be vacated. Id. Because the six-month period

had not run before the bankruptcy court issued the order of

relief on September 15, 2004, the trustee had until November 15,

2004 to move to vacate the judgment. 11 U.S.C. § 108(b). Ac-

cording to the trustee, he spent 30 minutes studying the Cali-

fornia statute after his appointment on September 21 and

concluded that it would not be feasible for the estate, which

had no assets at the time, to try to vacate the judgment.

12 Nos. 10-2057, 11-1393 & 11-3597

that CMGT’s unsecured creditors would receive a

fraction of any recovery. The agreement provided that

Spehar Capital would advance the estate $5,000 for the

costs of investigating the malpractice claim (an amount

that could be increased to $18,500). If the estate re-

covered on the claim, Spehar Capital would receive, de-

pending on the specific amount, approximately 80 to

90 percent of the net recovery after expenses (including

the attorney’s contingency fee).3 The agreement was

accepted by the bankruptcy court on September 2,

2005, and no creditors exercised their right to object

to its terms. After the agreement was made, Spehar

Capital filed a proof of claim for a secured amount of

$13,427,560 and an unsecured claim for $3,618,220.4

3

This recovery is less than Spehar Capital would be entitled

to under the bankruptcy code. At the time the agreement

was signed, it was unclear whether Spehar Capital was a

secured creditor or an unsecured creditor. To our knowledge

the estate has no other secured creditors. Therefore, if Spehar

Capital were a secured creditor, without the agreement,

Spehar Capital would receive full payment on its secured

claim before any of the other creditors would be compensated.

If Spehar Capital were an unsecured creditor, it would receive

approximately 90 percent of any recovery under a pro rata

distribution because its $17 million claim constitutes over

90 percent of the claims on the estate. In both scenarios,

Spehar Capital would receive less under the financing agree-

ment than it would have without the agreement.

4

The trustee challenged the secured claim on the ground

that Spehar Capital did not properly serve CMGT with a cita-

(continued...)

Nos. 10-2057, 11-1393 & 11-3597 13

Spehar Capital then recommended to the trustee a

lawyer specializing in malpractice who would handle

the case for a contingent fee. The trustee requested

CMGT’s case file from Mayer Brown and provided

it to Spehar Capital and its preferred lawyer for inves-

tigation. The proposed counsel declined to take the

case. Spehar Capital then recommended that the

trustee hire attorney Edward Joyce in his place, which

the trustee did. As the statute of limitations deadline

approached, Spehar Capital became increasingly anxious

about whether the suit would be filed. The trustee re-

sponded that he was leaving the decision to file or not

in Joyce’s hands.

4

(...continued)

tion to discover assets before filing the bankruptcy petition.

Before filing the bankruptcy petition, Spehar Capital acted

to ensure that it would have a secured claim against CMGT.

Spehar Capital domesticated the California judgment in

Illinois on March 31, 2004 and then filed a citation notice and a

notice to discover assets in Illinois court. Under Illinois law,

filing a citation enables a creditor to attach a secured lien to

the property of the debtor. Illinois, however, requires that the

citation be served on the debtor, and the bankruptcy judge

held that proper service did not occur here. In re CMGT, Inc.,

402 B.R. 262 (Bankr. N.D. Ill 2009). The district court re-

versed, reasoning that the post-petition financing order pre-

vented the trustee from arguing that Spehar Capital did not

have a secured claim. In re CMGT, 424 B.R. 355 (N.D. Ill. 2010).

14 Nos. 10-2057, 11-1393 & 11-3597

E. Procedural History

On August 23, 2005, the trustee, through counsel Joyce,

filed this action in Illinois state court. The complaint

contained two counts of malpractice that the trustee is

still pursuing. 5 Count I alleges that Mayer Brown negli-

gently advised CMGT with respect to the consequences

of Spehar Capital filing suit and that as a result, CMGT

was unable to close the Trautner deal or any other fi-

nancing deal. If CMGT had closed a deal, the trustee

alleges, it would have become a highly profitable com-

pany; instead, CMGT went bankrupt. Among other al-

leged failures, Mayer Brown supposedly failed to advise

CMGT “that a very probable consequence of a lawsuit

by [Spehar Capital], regardless of its merit, would be

that CMGT would not receive funding from any

source.” Count II alleges that Mayer Brown failed to

defend CMGT adequately (or failed to make clear that

it would not defend CMGT) against Spehar Capital’s

lawsuit and that as a result, CMGT sustained damages in

the amount of the $17 million default judgment. Mayer

Brown promptly removed to federal court under the

bankruptcy removal statute, 28 U.S.C. § 1452, and the

district court properly exercised jurisdiction because this

dispute is “related to” a bankruptcy proceeding. (Any

money recovered from Mayer Brown will increase

the value of the bankruptcy estate.) See 28 U.S.C. § 1334(b);

Black v. USPS (In re Heath), 115 F.3d 521, 524 (7th Cir.

5

The original complaint alleged four counts of malpractice.

Counts III and IV have been dismissed voluntarily.

Nos. 10-2057, 11-1393 & 11-3597 15

1997) (proceeding is related to a bankruptcy when it is

“likely to affect the debtor’s estate”).

Mayer Brown next moved to dismiss this unusual

case, both for failure to state a claim and under the

theory that the case was brought with “unclean hands” as

part of a fraud on the court system orchestrated by

Spehar Capital to secure a bogus default judgment and

then collect it in bankruptcy through a meritless mal-

practice action. The district court denied the majority

of Mayer Brown’s motion. The court was initially not

convinced by the fraud on the court theory because the

trustee — not Spehar Capital — had brought the mal-

practice action, and because Mayer Brown did not

present clear evidence that the trustee had perpetrated

any fraud on the judicial system. Grochocinski v. Mayer

Brown Rowe & Maw LLP, No. 06 C 5486, 2007 WL 1875995,

at *3-4 (N.D. Ill. June 28, 2007). The court also found

that the trustee pled a sufficient claim for malpractice

under Count II and much of Count I.6

6

Specifically, the court rejected Mayer Brown’s arguments

that the trustee’s failure to vacate the $17 million default

judgment necessarily made the trustee, at least as a matter of

law, the proximate cause of the loss and that the $17 million

default judgment could not constitute damages for malpractice

under Illinois law because it had never been paid. Grochocinski

v. Mayer Brown Rowe & Maw LLP, No. 06 C 5486, 2007 WL

1875995, *7-12 (N.D. Ill. June 28, 2007). The court also found

that the language of Mayer Brown’s engagement letter did

not foreclose as a matter of law the possible existence of a duty

(continued...)

16 Nos. 10-2057, 11-1393 & 11-3597

Mayer Brown moved to reconsider. The court denied

the motion but noted that it now found the “unclean

hands” theory “very persuasive” and opened discovery

for the limited purpose of investigating the issue.

Grochocinski v. Mayer Brown Rowe & Maw LLP, No. 06 C

5486, 2010 WL 1407256, at *8 (N.D. Ill. Mar. 31, 2010).

After discovery, Mayer Brown moved for summary

judgment on its unclean hands theory, arguing that it

would be absurd for Spehar Capital to receive the lion’s

share of any recovery when proving the causation ele-

ment of malpractice would require the trustee to prove

that Spehar Capital had never been entitled to prevail

in the California suit.

The district court granted summary judgment in favor

of Mayer Brown. The district court did not apply the

doctrine of unclean hands but instead relied on the doc-

trine of judicial estoppel, holding that it prevented the

trustee from taking a position in this lawsuit incon-

sistent with Spehar Capital’s position in the California

suit. Acknowledging that the parties to this suit are

different from the California suit, the district court

found this was not a per se bar because judicial estoppel

is “concerned solely with protecting the integrity of the

6

(...continued)

of care to CMGT and that several other alleged acts of mal-

practice could be actionable. We do not address any of those

issues here. The district court also found, though, that Mayer

Brown could not be liable for failure to advise that Spehar

Capital would sue or for failure to provide legal advice

to CMGT’s shareholders. Id. at *8-9.

Nos. 10-2057, 11-1393 & 11-3597 17

courts, not the relationship between the parties to the

prior litigation.” Id. at *10. The court found it appropriate

to bind the trustee to Spehar Capital’s prior conduct

because the trustee “acted at all times as a proxy for the

real party in this case, SC.” Id., citing Taylor v. Sturgell,

553 U.S. 880 (2008) (recognizing exception to rule

against non-party preclusion for relitigation through

proxy). The court then found that Spehar Capital’s judg-

ment in the California suit was inconsistent with the

trustee’s need to prove in the malpractice suit that

Spehar Capital was never entitled to the judgment in

the first place and that without this argument, the mal-

practice action failed as a matter of law. In two later

proceedings, the district court denied Gerard Spehar’s

post-judgment motion to intervene and denied nearly

all of Mayer Brown’s motion for sanctions against the

trustee and his lawyer Joyce. The trustee, Spehar, and

Mayer Brown have all appealed. The appeals were con-

solidated and we have jurisdiction over each as an

appeal from a final judgment pursuant to 28 U.S.C. § 1291.

II. Summary Judgment in Favor of Mayer Brown

Summary judgment is appropriate if there are no

genuine issues of material fact such that the moving

party is entitled to judgment as a matter of law. Fed. R.

Civ. P. 56(a). We review the district court’s grant of

summary judgment de novo, giving the non-moving party

the benefit of conflicts in the evidence and reasonable

inferences that could be drawn from it. See Good v. Univ.

of Chicago Med. Ctr., 673 F.3d 670, 673 (7th Cir. 2012). We

18 Nos. 10-2057, 11-1393 & 11-3597

may affirm the grant of summary judgment on “any

alternative basis found in the record as long as that

basis was adequately considered by the district court

and the nonmoving party had an opportunity to con-

test it.” Best v. City of Portland, 554 F.3d 698, 702 (7th

Cir. 2009). On appeal, the trustee argues that the district

court erred in applying judicial estoppel by attributing

to the estate Spehar Capital’s previous litigation con-

duct. We find no fault with the application of judicial

estoppel in this case.

Judicial estoppel is a flexible equitable doctrine de-

signed to prevent “the perversion of the judicial pro-

cess.” In re Cassidy, 892 F.2d 637, 641 (7th Cir. 1990). The

doctrine protects the courts from being “ ‘manipulated

by chameleonic litigants who seek to prevail, twice, on

opposite theories.’ ” Ogden Martin Systems of Indianapolis,

Inc. v. Whiting Corp., 179 F.3d 523, 527 (7th Cir. 1999)

(quotations omitted); Ladd v. ITT Corp., 148 F.3d 753, 756

(7th Cir. 1998) (“the purpose of the doctrine . . . is to

reduce fraud in the legal process by forcing a modicum

of consistency on a repeating litigant”). It may be raised

by any party, regardless of whether the party was preju-

diced by the inconsistency, or by the court on its own

motion. See In re Cassidy, 892 F.2d at 641. Because the

doctrine is a “matter of equitable judgment and discre-

tion,” we review a district court’s application of the

doctrine for an abuse of that discretion. In re Knight-

Celotex, LLC, 695 F.3d 714, 721 (7th Cir. 2012).

The application of judicial estoppel is “not reducible

to any general formulation of principle,” though the

Nos. 10-2057, 11-1393 & 11-3597 19

inquiry is typically informed by several factors. New

Hampshire v. Maine, 532 U.S. 742, 750 (2001) (quotation

omitted). The Supreme Court has identified three con-

siderations to help guide the inquiry: (1) whether “a

party’s later position must be clearly inconsistent with

its earlier position;” (2) whether “the party has suc-

ceeded in persuading a court to accept that party’s

earlier position, so that judicial acceptance of an incon-

sistent position in a later proceeding would create

the perception that either the first or second court was

misled;” and (3) whether “the party seeking to assert

an inconsistent position would derive an unfair ad-

vantage or impose an unfair detriment on the opposing

party if not estopped.” Id. at 750-51 (quotations omitted).

We have emphasized that these are not rigid require-

ments but “general guideposts that must be considered

in the context of all the relevant equities in any given

case.” In re Knight-Celotex, LLC, 695 F.3d at 722.

The trustee bases his appeal on a question of first im-

pression: What showing is required to apply judicial

estoppel to a litigant based on the litigation positions

of someone else? 7 The trustee argues that the district

court erred in applying judicial estoppel by attributing

to the estate Spehar Capital’s previous litigation posi-

tions. According to the trustee, estoppel based in part on

7

The trustee has not objected to the applicability of any of the

other judicial estoppel factors, so we consider any such argu-

ments waived. See Carroll v. Lynch, 698 F.3d 561, 567-68 (7th

Cir. 2012).

20 Nos. 10-2057, 11-1393 & 11-3597

the conduct of a non-party must comport with the ex-

ceptions to non-party preclusion identified in Taylor v.

Sturgell, 553 U.S. 880 (2008), and the district court erred

in concluding that one of these limited exceptions was

met, at least as a matter of law on summary judgment.

Mayer Brown responds that judicial estoppel is more

flexible than the preclusion doctrines and can be

applied regardless of whether the case meets an excep-

tion identified in Taylor.8

We agree with Mayer Brown that the applicability of

judicial estoppel is not limited to the exceptions for

8

Taylor addressed whether the doctrines of claim and issue

preclusion could bind a non-party to a judgment in an

identical suit if the non-party was “virtually represented” by a

party. The government asked the Supreme Court to adopt

a “heavily fact-driven” and “equitable” approach to non-party

claim and issue preclusion through which a court would

make a “close enough” determination of whether a non-party

should be precluded. Taylor, 553 U.S. at 898-99. The Supreme

Court concluded that such a “diffuse balancing” approach

did not provide sufficient respect for the fundamental nature

of the general rule that “ ‘one is not bound by a judgment in

personam in a litigation in which he is not designated as a

party or to which he has not been made a party by service of

process.’ ” Id. at 893, quoting Hansberry v. Lee, 311 U.S. 32,

40 (1940). The Court concluded that only discrete, clearly

delineated exceptions are consistent with the fundamental

guarantee to one’s own day in court. Because we find Taylor

inapplicable to this case, we express no view on whether the

facts of this case fall within one of the discrete exceptions

recognized in Taylor.

Nos. 10-2057, 11-1393 & 11-3597 21

claim and issue preclusion identified in Taylor. Judicial

estoppel is more flexible than the claim and issue pre-

clusion doctrines that were the concern in Taylor. It is

true that both the preclusion doctrines and judicial

estoppel attempt to ensure consistent results across

proceedings. E.g., Montana v. United States, 440 U.S. 147,

154 (1979) (noting that claim preclusion “fosters reliance

on judicial action by minimizing the possibility of incon-

sistent decisions”). But judicial estoppel is concerned

more generally with protecting the integrity of the

courts from the appearance and reality of manipulative

litigation conduct. See New Hampshire, 532 U.S. at 749-50

(collecting cases that “have uniformly recognized that

[the doctrine’s] purpose is to protect the integrity of the

judicial process”) (quotations omitted). Judicial estoppel

is a flexible equitable doctrine that is not “reducible to

any general formulation of principle” and accordingly

does not lend itself to rigid rules. Id. at 750. To protect

the integrity of the judicial process, a court needs

freedom to consider the equities of an entire case. There-

fore it is appropriate for a court considering judicial

estoppel effects of a non-party’s conduct to engage in

an equitable inquiry that turns on the specific circum-

stances of an individual case. With this in mind, we

turn to the equities of this case.

The district court concluded that the unusual circum-

stances of this case made it equitable to treat the trustee

and Spehar Capital as the same entity so that positions

taken by Spehar Capital in the California suit would be

attributed to the trustee for purposes of judicial estoppel.

The court pointed to a wealth of undisputed evidence

22 Nos. 10-2057, 11-1393 & 11-3597

demonstrating the appropriateness of treating Spehar

Capital and the trustee as one and the same for this

purpose. Spehar Capital was instrumental in or-

chestrating both the bankruptcy and the filing of this

suit. Spehar Capital forced CMGT into bankruptcy for

the purpose of convincing the trustee to bring a mal-

practice action against CMGT’s counsel. Once CMGT was

in bankruptcy, Spehar Capital approached the trustee

about bringing this suit. When the trustee was

reluctant, Spehar Capital agreed to lend the trustee

money to investigate the possible claim and to carve out

a small portion of any recovery for the benefit of the

unsecured creditors. Spehar Capital then recommended

the attorney to bring the suit and frequently com-

municated with the attorney. And of course, Spehar

Capital was set to receive the lion’s share of any recov-

ery. Together, all of these undisputed facts convinced

the district court that it was appropriate to hold the

trustee accountable for the positions taken by Spehar

Capital in the California suit. Grochocinski, 2010 WL

1407256, at *14. Once Spehar Capital’s conduct was con-

sidered, the district judge concluded that it would

be inconsistent for the trustee to prevail in the

malpractice case, for the benefit of Spehar Capital, on

the theory that Spehar Capital never should have

obtained the judgment in the California suit. And

without this argument, the court concluded, the mal-

practice action failed as a matter of law.

Based on the undisputed facts, the district court

did not abuse its discretion in reaching this conclusion

as a matter of its equitable judgment. This is not merely

Nos. 10-2057, 11-1393 & 11-3597 23

a case where the creditor of an estate previously took a

litigation position inconsistent with a position taken

by the trustee. Rather, Spehar Capital was intimately

involved in the genesis and the hoped-for end of this

suit. Spehar Capital forced CMGT into bankruptcy for

the purpose of allowing this suit to be brought and,

after filing the bankruptcy petition, worked tirelessly

to convince the trustee to bring suit. Given Spehar

Capital’s significant involvement in this case, if the

trustee were to prevail in this suit and Spehar Capital

were to receive the lion’s share of the recovery, the

courts would have been abused and misled. Preventing

such a reality and perception is a core purpose of judicial

estoppel. The district court’s opinion clearly showed

Spehar Capital’s intimate involvement in this case and

how this involvement created the impression that the

courts were being misused. The consideration of Spehar

Capital’s previous litigation was consistent with the

aims of judicial estoppel, and the district court did not

abuse its discretion by attributing Spehar Capital’s liti-

gation conduct to the trustee.

The trustee also argues that judicial estoppel is inequi-

table here because it will unfairly prevent the innocent

unsecured creditors from receiving any recovery. In

other circumstances, this could be a serious concern, but

it does not sway the equities in this case. Had it not

been for Spehar Capital’s insistence, this suit never

would have been brought. Before Spehar contacted the

trustee about bringing this action, the trustee was pre-

pared to terminate the bankruptcy as a no-asset estate.

If the trustee had followed that course, the unsecured

24 Nos. 10-2057, 11-1393 & 11-3597

creditors would have received no recovery as well. Since

this suit would not have been brought but for Spehar

Capital and the bulk of any recovery would wind up

in its pockets, it was not an abuse of discretion to

conclude that foreclosing the unsecured creditors’

recovery did not tip the scales against the use of judicial

estoppel. We affirm the grant of summary judgment

in favor of Mayer Brown.

III. Intervention

Also before this court is Gerard Spehar’s appeal of

the denial of his motion to intervene pursuant to

Federal Rule of Civil Procedure 24. Mr. Spehar argues

that he should be allowed to intervene both as of right

and permissively because his professional reputation

and ability to earn a living were placed at issue in this

suit when the district court concluded that he had or-

chestrated an attempted fraud on the court. Mr. Spehar

moved to intervene on April 28, 2010, nearly one

month after the district court granted summary judg-

ment in favor of Mayer Brown and over two and a

half years after the court granted discovery on the de-

fendants’ fraud on the court theory. The district court

denied the motion to intervene as untimely. Grochocinski

v. Mayer Brown Rowe & Maw LLP, No. 06 C 5486, 2011

WL 382737 (N.D. Ill. Feb. 3, 2011). We review the

denial of a motion for intervention as untimely for

abuse of discretion. B.H. v. McDonald, 49 F.3d 294,

297 (7th Cir. 1995). We find no merit in the appeal

and affirm.

Nos. 10-2057, 11-1393 & 11-3597 25

Rule 24 provides two avenues for intervention, either

of which must be pursued by a timely motion. See Heart-

wood, Inc. v. U.S. Forest Serv., 316 F.3d 694, 701 (7th

Cir. 2003). The timeliness requirement forces interested

non-parties to seek to intervene promptly so as not to

upset the progress made toward resolving a dispute.

We look to four factors to determine whether a motion is

timely: “(1) the length of time the intervenor knew or

should have known of his interest in the case; (2) the

prejudice caused to the original parties by the delay; (3) the

prejudice to the intervenor if the motion is denied;

(4) any other unusual circumstances.” Sokaogon Chippewa

Cmty. v. Babbitt, 214 F.3d 941, 949 (7th Cir. 2000).9

The district court found that each of the four factors

weighed against the timeliness of Spehar’s motion. First,

the court concluded that Spehar should have known

that his personal and professional interests may have

been affected by this suit on October 30, 2007 when the

court granted discovery on the “unclean hands” defense.

The court noted that Spehar was actually aware of the

9

A court must permit a non-party to intervene as of right if

he “claims an interest relating to the property or transaction

that is the subject of the action, and is so situated that

disposing of the action may as a practical matter impair or

impede the movant’s ability to protect its interest, unless

existing parties adequately represent that interest.” Fed. R.

Civ. P. Rule 24(a)(2). If a person cannot intervene as of right,

a court may permit him to intervene if he “has a claim or

defense that shares with the main action a common question

of law or fact.” Fed. R. Civ. P. 24(b)(1)(B).

26 Nos. 10-2057, 11-1393 & 11-3597

issue because he notified the CFA Institute of the allega-

tions against him in the suit, yet he did not move to

intervene until April 28, 2010, after the district court

had already granted summary judgment. Second, al-

lowing intervention would have prejudiced Mayer

Brown because it would have caused additional delay

in resolving this case, which had reached a final judg-

ment. Third, the court found that Spehar would not be

significantly prejudiced because he was heavily in-

volved in the lawsuit behind the scenes, and the trustee

had adequately rebutted the personal attacks Mayer

Brown had made against Spehar. Fourth, there were no

other unusual circumstances justifying intervention.

Spehar raises a number of frail arguments challenging

the district court’s ruling. First, he argues that allowing

intervention and vacating the final judgment would

cause no prejudice to Mayer Brown because no merits

discovery has occurred in the case. This argument

ignores the costs Mayer Brown had already incurred

investigating and briefing the issues in the district court

before the motion to intervene. Second, Spehar argues

that he first learned that his professional reputation

was at issue in this case when the district court

granted summary judgment on March 31, 2010. He

claims that the “unclean hands” defense referred only to

the conduct of the trustee. This is simply not true. In

its opinion denying Mayer Brown’s motion to dismiss

issued on June 28, 2007, the court made clear that the

“unclean hands” argument focused on Mr. Spehar. The

court found that the “most obvious problem with the

Lawyer Defendant’s argument is that Spehar — which

Nos. 10-2057, 11-1393 & 11-3597 27

is not a party to this action — is the entity that had al-

legedly orchestrated a ‘fraud on the judicial system.’ ”

Grochocinski v. Mayer Brown Rowe & Maw LLP, No. 06 C

5486, 2007 WL 1875995, at *4 (N.D. Ill. June 28, 2007).

When the court granted discovery on this defense on

October 30, 2007, Spehar could have missed the implica-

tions for his reputation only if he was willfully blind to

them. Third, Spehar argues that the district court dis-

counted the severe prejudice he will suffer from the

denial of intervention because the court’s findings have

left him “effectively unemployable.” Although we are

skeptical that this prejudice is “an interest relating to

the property or transaction that is the subject of the

action,” even if it were, the district court acted well within

its discretion to conclude that the motion for interven-

tion — filed two and a half years after Spehar knew his

reputation may be at issue in the case — was untimely.1 0

10

We affirm the denial of intervention as untimely without

reaching an obvious and much more fundamental issue:

whether the reputational interests of a witness in case can

support the witness’ intervention in the case as a party. Judges

and juries must often evaluate the conduct and credibility

of people and institutions that are not parties. Judges’ findings

and comments are often critical of non-parties, not gratui-

tously but as a necessary part of deciding the cases properly

before them. To hold that the prospect of a judge’s adverse

finding or comment could support intervention as a party,

with rights to appeal, for example, even if the original parties

are satisfied with the outcome, would amount to a stunning

expansion of standing and would invite prolonged and

even endless litigation.

28 Nos. 10-2057, 11-1393 & 11-3597

IV. Cross-appeal on Sanctions

We turn now to Mayer Brown’s cross-appeal of the

denial of its motions for sanctions against the trustee

and attorney Joyce for prosecuting a frivolous and fraud-

ulent claim. Mayer Brown sought sanctions in the dis-

trict court against both under the court’s inherent

authority and against Joyce under 28 U.S.C. § 1927, as well.

The federal courts have the inherent power to impose

a wide range of sanctions upon parties for abusive litiga-

tion. This inherent power, however, is limited to “cases

in which a litigant has engaged in bad-faith conduct or

willful disobedience of a court’s orders.” Chambers v.

NASCO, Inc., 501 U.S. 32, 47 (1991); see also Mach v. Will

County Sheriff, 580 F.3d 495, 501 (7th Cir. 2009). There is

no single litmus test for determining what constitutes

bad faith, though more than mere negligence is required.

See Maynard v. Nygren, 332 F.3d 462, 471 (7th Cir. 2003)

(noting court has “no authority under the Rules or

under the inherent powers of the court to sanction attor-

neys for mere negligence”). Sanctions against counsel

under 28 U.S.C. § 1927 are appropriate when “counsel

acted recklessly, counsel raised baseless claims despite

notice of the frivolous nature of these claims, or counsel

otherwise showed indifference to statutes, rules, or court

orders.” Kotsilieris v. Chalmers, 966 F.2d 1181, 1184-85

(7th Cir. 1992).

The district court found that the trustee was negli-

gent in entrusting the case to Joyce without actively moni-

toring the litigation but that sanctions were not ap-

propriate because his conduct was not more than “mere

Nos. 10-2057, 11-1393 & 11-3597 29

negligence.” Grochocinski v. Mayer Brown Rowe & Maw

LLP, 452 B.R. 676, 683 (N.D. Ill. 2011). The court also

concluded that sanctions were not appropriate for

Joyce because his arguments against the fraud on the

court defense “were not frivolous.” Id. at 685. We

review the denial of sanctions for abuse of discretion.

Dal Pozzo v. Basic Mach. Co., 463 F.3d 609, 614 (7th Cir.

2006). We conclude that the district court did not

abuse its discretion.

A. Trustee Grochocinski

The district court concluded that sanctions against

the trustee were unwarranted because he was not more

than negligent. In support of this conclusion, the court

focused on the fact that the trustee had no professional

experience with legal malpractice claims and relied on

his special counsel to prosecute the case. According to

the court, the trustee’s reliance on special counsel with-

out significant oversight was negligent but not worse.

Grochocinski, 452 B.R. at 684 (citing 11 U.S.C. § 327(a),

which “specifically provides for the employment of

special counsel”). Mayer Brown argues that this con-

clusion was an abuse of discretion both because the

district court applied the incorrect law and because the

factual conclusion was unreasonable. We disagree.

First, Mayer Brown contends the district court erred

by employing the more forgiving “willful and deliberate”

standard to the trustee’s conduct. It is well established

that a bankruptcy trustee may not be held personally

30 Nos. 10-2057, 11-1393 & 11-3597

liable for a breach of her fiduciary duties unless the

breach was “willful and deliberate . . . .” In re Chicago

Pacific Corp., 773 F.2d 909, 915 (7th Cir. 1985). Mayer

Brown argues that it was error to apply this standard

because the willful and deliberate standard should

govern only motions for sanctions for breaches of a

trustee’s fiduciary duties, not sanctions for litigation con-

duct. This distinction makes intuitive sense, but we

need not determine whether bankruptcy trustees are

always subject to the willful and deliberate standard

because the choice of standard is not decisive in this

case. The choice of standard did not affect the outcome

of the sanctions motion because the district judge con-

cluded that the trustee was not more than negligent,

and negligence alone is not a sufficient basis for

issuing sanctions under the court’s inherent authority.

See Maynard, 332 F.3d at 471.

Second, Mayer Brown argues that it was unreasonable

for the court to conclude that the trustee’s behavior

was not more than negligent while at the same time

dismissing the suit as a fraud on the court. Mayer Brown

contends that the trustee was more than negligent in

allowing this case to be filed because he knew that

Spehar Capital’s default judgment was unfounded and

that the suit was a vehicle for Spehar Capital to collect on

the judgment. Moreover, the trustee failed to conduct

an independent investigation into the underlying facts

of the case and instead was content to rely on Spehar’s

representations. Thus, he “willingly allowed his office

to become the vehicle for the fraud.”

Nos. 10-2057, 11-1393 & 11-3597 31

While these arguments have considerable force

and could have persuaded another judge to impose

sanctions, abuse of discretion is a deferential standard

that permits different courts to reach different results so

long as the results are within the bounds of reason. The

flexibility we afford district judges on matters within

their discretion reflects the idea that their firsthand

familiarity with a case makes them better situated to

resolve issues committed to their discretion. An “abuse

occurs only when a court has acted contrary to the law

or reached an unreasonable result.” Sokolik v. Milwaukee

Sch. of Eng’g (In re Sokolik), 635 F.3d 261, 269 (7th Cir. 2011).

Here we cannot say that the district court’s decision

not to award sanctions was unreasonable. This is not a

case in which the district judge failed to appreciate the

gravity of the conduct. To the contrary, the district

judge was obviously troubled by this case. The court’s

opinions issued throughout this litigation did not hold

back in criticizing Spehar, Joyce, and the trustee, yet

despite this clear recognition of troublesome conduct,

the district judge concluded that sanctions were inap-

propriate. Members of this panel might have come to a

different conclusion, but given the thoroughness of the

district court’s analysis and its clear recognition of the

gravity of the alleged misconduct, we cannot say that the

decision to deny sanctions against the trustee was unrea-

sonable.

B. Attorney Joyce

The district court also concluded that sanctions were

unwarranted against attorney Joyce under the court’s

32 Nos. 10-2057, 11-1393 & 11-3597

inherent authority and 28 U.S.C. § 1927. The court found

that sanctions were inappropriate because the mal-

practice claims in the complaint were not unfounded

and Joyce did not unreasonably prolong the pro-

ceedings in contesting the “unclean hands” defense.

Mayer Brown argues that this was error, raising objec-

tions similar to those regarding the denial of sanctions

against the trustee.1 1

Mayer Brown contends that the district court erred in

its conclusion that attorney Joyce did not persist in

making frivolous claims to the court after Mayer Brown

first raised its fraud on the court defense. According

to Mayer Brown, the motion to dismiss put Joyce on

notice of the problems with the suit, and he should

have dismissed the case voluntarily. The district court,

however, found that Joyce’s responses to Mayer Brown’s

motions to dismiss and for summary judgment con-

tained arguments that were not frivolous. The court

recognized that the fraud on the court defense was

novel and that Joyce had a reasonable argument that jud-

icial estoppel should not apply in this case. Grochocinski,

452 B.R. at 685-86. While it would have been preferable

if Joyce had decided not to bring this case at all, the

district court did not act unreasonably in concluding that

he did not make frivolous claims before the court. The

11

The district court concluded the same reasons that

weighed against sanctions under section 1927 applied to the

court’s inherent authority. For simplicity, we address the

issues together.

Nos. 10-2057, 11-1393 & 11-3597 33

applicability of judicial estoppel (and Mayer Brown’s

other defenses) to this case was not clearly established

before Joyce brought suit, and there were reasonable

but ultimately unpersuasive grounds for arguing that

the estate should not be held to account for Spehar Capi-

tal’s inconsistent conduct. We have rejected those argu-

ments on the merits, but the district court did not abuse

its discretion in denying sanctions under section 1927

or under the court’s inherent authority.

V. Conclusion

We hope this peculiar and misguided case has reached

its end. We A FFIRM the grant of summary judgment

in favor of the defendants. We also A FFIRM the denial

of Mr. Spehar’s motion to intervene and the denial of

sanctions against the trustee and attorney Joyce.

6-21-13