Mrozek v. Intra Financial Corp.

• Decision Date: 09 June 2005
• Docket Number: No. 2002AP2448.,2002AP2448.
• Citation: 699 N.W.2d 54,2005 WI 73,281 Wis.2d 448
• Parties: Patricia MROZEK and Plover Motel, Inc., Plaintiffs-Appellants-Petitioners, v. INTRA FINANCIAL CORPORATION and James Graves, Defendants, MALLERY & ZIMMERMAN, S.C., Defendant-Respondent.
• Court: Wisconsin Supreme Court

281 Wis.2d 448

2005 WI 73

699 N.W.2d 54

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

No. 2002AP2448.

Supreme Court of Wisconsin.

Oral argument March 1, 2005.

Decided June 9, 2005.

For the plaintiffs-appellants-petitioners there were briefs by Elizabeth R. Olson, William P. Skemp and William Skemp Law Firm, S.C., LaCrosse, and oral argument by William P. Skemp.

For the defendant-respondent there was a brief by Ross A. Anderson, Barbara J. Janaszek and Whyte Hirschboeck Dudek S.C., Milwaukee, and oral argument by Ross A. Anderson.

¶ 1. PATIENCE DRAKE ROGGENSACK, J.

Patricia Mrozek and Plover Motel, Inc. (PMI) seek review of a court of appeals decision affirming the circuit court's¹ grant of summary judgment to Mallery & Zimmerman, S.C. (Mallery) dismissing Mrozek's and PMI's claims for the negligent provision of legal services. We conclude that the circuit court correctly granted summary judgment dismissing the claim of PMI for lost profits, as well as Mrozek's claim for lost management fees that was dependent on PMI's claim for lost profits. However, we conclude that it was error to dismiss Mrozek's and PMI's other claims. Accordingly, we affirm in part, reverse in part and remand to the circuit court for further proceedings on Mrozek's and PMI's remaining claims based on the allegedly negligent provision of legal services.

I. BACKGROUND²

¶ 2. Mrozek wanted to build a motel in Plover, Wisconsin and obtain an AmericInn franchise for it. She retained Mallery in June of 1992 to provide legal advice in forming a corporation that would construct and operate the motel, in financing the hotel construction and in negotiating with AmericInn Motel for a franchise.

¶ 3. Mallery drafted the articles of incorporation for PMI, which was incorporated August 25, 1992. Mrozek estimated the cost of constructing the motel at approximately $2.8 million. She hoped to finance the project in part through a private stock offering, the offering memorandum for which she asked Mallery to draft, and in part through an institutional loan.

¶ 4. Between August 1992 and February 1993, Mrozek obtained investment loans totaling more than $500,000 from approximately 20 individuals. Mrozek represented to these investors that the loans would be used for the construction of the motel, which would ultimately generate a 10% return on their investments. When each loan was made, the investor received a note promising PMI would repay the principal of the loan, plus interest, within a specified time.

¶ 5. Mrozek alleges that Mallery knew of these initial notes, but that Mallery did not inform her that her solicitation of these private investment loans violated Wisconsin laws. Instead, Mrozek says that Mallery agreed to draft replacement notes for the private investors, which notes were to be secured by mortgages on the motel property that Mallery would record with the Portage County Register of Deeds. Apparently, Mallery did draft replacement notes and mortgages, but Mrozek alleges that Mallery did not timely record the mortgages, causing the mortgages to become worthless as security for the investors' loans.

¶ 6. On September 25, 1992, PMI purchased approximately three acres of property on which the motel was to be constructed. Mallery negotiated with Intra Financial Corporation (IFC)³ to construct the motel for PMI, and assisted at the execution of the construction contract on October 10, 1992.

¶ 7. Also as part of the services Mallery provided to Mrozek and to PMI, Mallery drafted a private placement memorandum to sell securities in PMI. This private placement memorandum was filed with the Wisconsin Commissioner of Securities on February 5, 1993. According to Mrozek, the memorandum was not accurately drafted, causing the Commissioner of Securities to initially reject it. Additionally, after the memorandum was amended, she was unable to locate any purchasers who could meet the Commissioner's "investor suitability standards" that restricted who could invest in PMI based on the potential investor's net worth and income. In late 1993, the Commissioner revoked all sales of PMI stock.

¶ 8. On February 19, 1993 when PMI's costs depleted the initial $500,000 raised and it became delinquent in payments to IFC, IFC sent a Notice of Intent to file a construction lien against the motel property, and on April 29, 1993, it filed a construction lien. IFC then initiated a lawsuit to collect unpaid bills and to foreclose its lien. ¶ 9. In late 1993, Mallery withdrew from representing Mrozek and PMI. However, prior to Mallery's withdrawal, Mrozek was charged with thirteen counts of willfully failing to disclose material facts under Wis. Stat. § 551.41(2) (2001-02),⁴ in connection with PMI's sale of notes for the motel project. Mrozek obtained other counsel, and pursuant to a plea agreement, pled guilty to two counts of felony securities fraud under § 551.41(2) and to three counts of misdemeanor theft by fraud, under Wis. Stat. § 943.20(1)(d).⁵ 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.

¶ 10. In 1994, because of a lack of funds to pay outstanding construction bills and complete the motel's construction, PMI filed a voluntary Chapter 11 bankruptcy. The bankruptcy filing stayed a pending sheriff's sale of the motel property that had been ordered in IFC's lien foreclosure action. Schedules that PMI filed with its bankruptcy petition listed a claim against Mallery for the negligent delivery of legal services as an asset of PMI, and also identified Mallery as an unsecured creditor of PMI for unpaid legal bills. However, Mallery never filed a proof of claim in the bankruptcy action. Pursuant to a stipulation, the motel property and AmericInn franchise rights were transferred to IFC, who in turn transferred them to another corporation that operated the motel thereafter.

¶ 11. IFC then moved to convert the bankruptcy from a Chapter 11 reorganization to a Chapter 7 liquidation, asserting that "because [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 Mallery, but did unsuccessfully pursue a claim against IFC for "disgorgement" of excess profits. The trustee then 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." The bankruptcy court discharged all remaining debts against PMI and closed the estate.

¶ 12. Mrozek and PMI thereafter commenced this action against Mallery, alleging in an amended complaint that the firm was negligent in its legal representation of both Mrozek and PMI and that Mallery also breached fiduciary duties it owed to them.⁶ The circuit court granted summary judgment to Mallery on Mrozek's claim, concluding that her guilty plea precluded her malpractice claim against Mallery for any damages arising out of her criminal conviction. The circuit 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 re-litigating a claim that could have been raised and resolved as a part of the bankruptcy proceedings. Finally, the circuit court concluded that neither Mrozek nor PMI had made sufficient evidentiary submissions to support claims for damages based on future lost profits. Mrozek and PMI appealed.

¶ 13. The court of appeals affirmed the dismissal of all claims, but on slightly different grounds. It first concluded that Mrozek's guilty pleas and subsequent criminal convictions resulted in issue preclusion of "any issues of fact or law necessarily encompassed" by Mrozek's criminal convictions, even though neither of the parties argued issue preclusion in the circuit court, the circuit court did not address issue preclusion and neither party argued issue preclusion on appeal. Second, it concluded that PMI's claims were barred by claim preclusion, holding that because any such claim was not proceeded upon by PMI's bankruptcy trustee, it was lost. Third, the court of appeals affirmed the circuit court's dismissal of Mrozek's and PMI's claims for lost profits, agreeing that they had provided insufficient proof to go forward.

II. DISCUSSION

A. Standard of Review

¶ 14. We review a circuit court's decision granting summary judgment independently, but we apply the same methodology as the circuit court. Smaxwell v. Bayard, 2004 WI 101, ¶ 12, 274 Wis. 2d 278, 682 N.W.2d 923. Pursuant to Wis. Stat. § 802.08(2), summary judgment "shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Therefore, "[s]ummary judgment should not be granted, `unless the facts presented conclusively show that the plaintiff's action has no merit and cannot be maintained.'" Smaxwell, 274 Wis. 2d 278, ¶ 12 (quoting Goelz v. City of Milwaukee, 10 Wis. 2d 491, 495, 103 N.W.2d 551 (1960)). In determining whether...