Mrozek v. Intra Financial Corp.

• Citation: 678 N.W.2d 264,271 Wis.2d 485,2004 WI App 43
• Decision Date: 26 February 2004
• Docket Number: No. 02-2448.,02-2448.
• Parties: Patricia MROZEK and Plover Motel, Inc., Plaintiffs-Appellants, v. INTRA FINANCIAL CORPORATION and James Graves, Defendants, MALLERY & ZIMMERMAN, S.C., Defendant-Respondent.
• Court: Court of Appeals of Wisconsin

271 Wis.2d 485

2004 WI App 43

678 N.W.2d 264

Patricia MROZEK and Plover Motel, Inc., Plaintiffs-Appellants,¹ v. INTRA FINANCIAL CORPORATION and James Graves, Defendants, MALLERY & ZIMMERMAN, S.C., Defendant-Respondent.

No. 02-2448.

Court of Appeals of Wisconsin.

Submitted on briefs May 14, 2003.

Decided February 26, 2004.

On behalf of the plaintiffs-appellants, the cause was submitted on the briefs of William P. Skemp of William Skemp Law Firm, S.C., La Crosse.

On behalf of the defendant-respondent, the cause was submitted on the brief of Ross A. Anderson and James P. Denis III of Whyte Hirschboeck Dudek, S.C., Milwaukee.

Before Deininger, P.J., Vergeront and Lundsten, JJ.

¶ 1. DEININGER, P.J.

Patricia Mrozek and Plover Motel, Inc. (PMI) appeal a judgment dismissing their complaint against Mallery & Zimmerman, S.C. Mrozek and PMI alleged that they suffered damages on account of the defendant law firm's negligent rendition of legal services. We conclude that issue preclusion, public policy, and the lack of evidence tending to show that PMI suffered future lost profits, entitle the Mallery firm to summary judgment on Mrozek's claims as an individual. We also conclude that claim preclusion bars PMI's malpractice action against the firm. Accordingly, we affirm the circuit court's dismissal of the complaint on summary judgment.

BACKGROUND

¶ 2. Patricia Mrozek, a financial advisor and licensed securities agent, retained the services of Mallery & Zimmerman, S.C. in 1992 to assist her in forming a corporation, "Plover Motel, Inc.," the sole purpose of which was to construct and operate an AmericInn franchise motel in Plover, Wisconsin. Mrozek estimated the cost of the project at approximately $2.8 million and, although she had no financing at the time PMI was formed, she intended to acquire the necessary funds through both a private stock offering and an institutional loan.

¶ 3. Shortly after hiring the Mallery firm, Mrozek began soliciting investments in the project from local citizens. Between August 1992 and February 1993, she obtained loans for the project from some twenty or more individuals totaling over $500,000. Mrozek represented to investors that the loans would be used for the construction of the Plover motel, the operation of which would ultimately generate the promised ten percent return on their investment. Each investor received a note promising that PMI would repay the principal of the loan, plus interest, within a specified time period. Most of the original promissory notes were subsequently replaced with mortgage notes. Mortgages securing the notes were recorded with the Portage County Register of Deeds.

¶ 4. While still in the process of raising funds from individual investors, and without having acquired institutional financing, Mrozek and PMI hired a general contractor and broke ground on the motel.² When construction and related costs depleted the $500,000 in initial investments, the general contractor filed construction liens against the property and initiated a lawsuit to collect unpaid bills and foreclose its liens.

¶ 5. During the time that Mrozek was engaged in obtaining loans and issuing PMI's notes to individual investors, she agreed to the voluntary revocation of her securities agent license by the Wisconsin Commissioner of Securities for her actions in the sale of unrelated investments. Also during this time, the Mallery firm prepared a private placement memorandum on behalf of Mrozek for the sale of shares in PMI and filed it with the commissioner's office for approval. The commissioner immediately rejected the memorandum because it incorrectly represented that Mrozek held a securities agent license. The commissioner accepted a revised offering memorandum and issued an exemption containing stringent "investor suitability standards" that restricted investors to those meeting certain net worth and income requirements.

¶ 6. No investors meeting the requirements for purchasing shares of PMI were found and, in late 1993, the commissioner revoked the exemption for the sale of PMI stock. Shortly thereafter, the Mallery firm withdrew from representing Mrozek and PMI.

¶ 7. At about the same time, the Portage County District Attorney, at the request of the commissioner's office, filed criminal charges against Mrozek alleging thirteen felony counts of willfully failing to disclose material facts in connection with PMI's issuance of the mortgage notes for the motel project. See WIS. STAT. § 551.41(2) (2001-02).³ Pursuant to a plea agreement, Mrozek pled guilty in 1995 to two counts of felony securities fraud under § 551.41(2) and to three counts of misdemeanor theft by fraud, WIS. STAT. § 943.20(1)(d).⁴ The court placed her on probation for the misdemeanor theft convictions, with jail time and restitution as conditions. Judgment on the felonies was withheld pursuant to a deferral agreement between Mrozek and the State.

¶ 8. Lacking adequate funding to pay outstanding construction bills and complete the motel project, PMI filed a voluntary Chapter 11 bankruptcy petition in 1994. The bankruptcy filing forestalled a pending sheriff's sale of the motel property that had been ordered in the contractor's lien foreclosure action. Schedules that PMI filed with its bankruptcy petition listed a claim against the Mallery firm for professional negligence as an asset of the corporation, and also identified the firm as an unsecured creditor of the corporation for its unpaid legal bills. Pursuant to a stipulation entered into and approved during the Chapter 11 proceedings, the motel property and AmericInn franchise rights were transferred to the contractor, who in turn transferred them to another corporation that operated the motel thereafter.

¶ 9. The contractor then filed a motion to convert the bankruptcy from Chapter 11 to a Chapter 7 liquidation, asserting that "[b]ecause [PMI] no longer owns the Property," [PMI] has no assets of substance, no business, no income, cannot generate funds to pay various expenses, and is completely unable to effectuate a [reorganization] plan," as required under Chapter 11. The bankruptcy court granted the motion over PMI's objection. The court appointed a trustee for the bankruptcy estate who would, in the words of the bankruptcy judge, "review the situation and determine ... whether there were any assets which should be pursued." The trustee chose not to pursue the scheduled claim against the Mallery firm but did pursue a claim, albeit unsuccessfully, against the contractor for "disgorgement" of excess profits. The trustee subsequently reported to the court that, after "diligent inquiry," there were "no assets in the estate" that were not either "inconsequential in value or burdensome to the estate." The trustee's report also recited that it constituted an "abandonment of all scheduled property of the bankruptcy estate," and the estate was ordered closed.

¶ 10. Mrozek and PMI thereafter commenced this action against the Mallery firm, alleging in an amended complaint that the firm was negligent in its legal representation of both Mrozek and PMI, and that the firm also breached fiduciary duties owed to them.⁵ The circuit court granted summary judgment to the Mallery firm on Mrozek's claim, concluding that her guilty plea precluded her from pursuing a malpractice claim against the Mallery firm for any damages arising out of her criminal conviction. The trial court also granted summary judgment dismissing PMI's negligence claim against the law firm after concluding that the doctrine of claim preclusion prevented PMI from relitigating a claim that could have been raised and resolved as a part of the bankruptcy proceedings. Finally, the trial court concluded that neither PMI nor Mrozek had made sufficient evidentiary submissions to support a claim for damages based on future lost profits. Mrozek and PMI appeal the dismissal of their claims.

ANALYSIS

¶ 11. We review an order for summary judgment de novo, applying the same standards as the trial court. See Voss v. City of Middleton, 162 Wis. 2d 737, 748, 470 N.W.2d 625 (1991)

. Summary judgment is proper when the pleadings, answers, admissions and affidavits show no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. See Maynard v. Port Publ'ns, Inc., 98 Wis. 2d 555, 558, 297 N.W.2d 500 (1980). We will reverse a decision granting summary judgment if the trial court incorrectly decided legal issues or if material facts were in dispute. Coopman v. State Farm Fire & Cas. Co., 179 Wis. 2d 548, 555, 508 N.W.2d 610 (Ct. App. 1993). Even if certain facts are in dispute, the dispute will not prevent the granting of summary judgment if the facts at issue are "not material to the legal issue on which summary judgment is sought." Tackes v. Milwaukee Carpenters Health Fund, 164 Wis. 2d 707, 711, 476 N.W.2d 311 (Ct. App. 1991).

¶ 12. To prevail in an action for legal malpractice, a plaintiff must prove four elements: (1) the existence of a lawyer-client relationship; (2) the acts or omissions constituting negligence; (3) that the attorney's negligence caused the plaintiff injury; and (4) the nature and extent of injury. See Lewandowski v. Continental Cas. Co., 88 Wis. 2d 271, 277, 276 N.W.2d 284 (1979)

. Mrozek and PMI bear the burden of establishing these four elements in order to recover on their malpractice claims against the Mallery firm. Thus, in order for their claims to survive summary judgment, it was incumbent on them "`to make a showing sufficient to establish the existence of [each] element essential'" to their case. See Transportation Ins. Co., Inc. v. Hunzinger Constr. Co., 179 Wis. 2d 281, 291-92, 507 N.W.2d 136 (Ct. App. 1993) (citation omitted).

I.

¶ 13. We begin with Mrozek's claim that she, personally, suffered damages on account of the law firm's negligence in two ways: (1) she was charged and convicted of several crimes, thereby incurring legal fees,...