Tuesday, July 15, 2008

Fiduciary Breach Not Established

The Wisconsin Supreme Court decided another interesting case today involving liability claims by a client against its former corporate counsel ("Krug"). The court concluded that there was insufficient evidence of a claimed breach of fiduciary duty and an insufficient basis to submit a punitive damages claim against Krug to a jury.

The client ("Berner") manufactures and sells cheese. Krug had served as corporation counsel since the 1980s. Dairy Source ("a cheese brokerage and distribution company") was involved in state and federal suits with Berner after a Berner employee took "Berner's full customer list, as well as... catalogue of recipes, pricing and formulas for its processed cheese division" and brought the information to Dairy Source. By coincidence, the disgruntled employee's spouse owned Dairy Source.  The information was stored in a Dairy Source office.

Krug advised Berner of options that included self-help, which Berner's owners exercised at a time when they knew the Dairy Source owner and their former employee were in Las Vegas. The Berner people removed 33 boxes of documents but sued in replevin (through other counsel) when they did not get all that they had sought. The replevin action was dropped but replaced by a federal court suit that led to counterclaims against Berner. Berner had independent counsel in the litigation, although Krug "maintained his role as corporation counsel." He advised (unwisely, it turned out) Berner to decline a $300,000 payment from Dairy Source to settle the claims.

Krug was deposed twice and then was considered a likely party defendant. He was concerned that insurance would not cover claims against him. He sought indemnification from Berner but the litigation was settled and Krug  was released from further liability. Berner sought a contribution to the settlement from Krug, but he declined to contribute. Berner ended up paying $1.35 million to Dairy Source. When litigation counsel sued Berner for legal fees, Berner counterclaimed for malpractice and brought Krug in as a third-party defendant alleging malpractice and breach of fiduciary duty. Those claims were dismissed but the dismissal was reversed on appeal. On remand, Berner partially prevailed on its malpractice claim against Krug, but had the fiduciary claim dismissed. The court of appeals affirmed and Berner sought review.

Clear enough? Berner's expert (Peter Rofes of Marquette, author of Ethics in Law School: The Confusion Persists, which I have used for years and dearly love) opined that there was a conflict between Krug and Berner and that the attorney's conduct fell below the required standard of care. The court found insufficient evidence of a breach of fiduciary duty as a matter of law:

...Brennan, not Krug, represented Berner in the litigation with Dairy Source. Berner does not dispute that its attorneys at Brennan were engaged with Dairy Source representatives in drafting the settlement document. Moreover, the admissions by Ed and Cheryl Kneubuehl belie Berner's claim that, because the settlement document releases Krug from all claims, the settlement was the product of undue influence. When asked whether Krug had any input into the settlement amount, Ed Kneubuehl testified that Krug had not. Cheryl Kneubuehl also testified that she did not recall Krug having any input in the settlement.

Therefore, although the settlement document may have conferred a benefit on Krug, there is no evidence that releasing Krug came at a cost to Berner, and thereby affected the parties reciprocally. Furthermore, although it is possible that some finite value could be attributed to the release of Krug, Berner has not presented any evidence to show what that value may be. For example, Berner has not presented any evidence that the cost of its settlement was increased due to Krug's release. Berner instead alleges that the full cost of the settlement agreement, $1.35 million, constitutes its damages for releasing Krug. No credible evidence supports Berner's claim in this regard.

Berner also has contended that it is entitled to a presumption that the settlement was the product of undue influence. The party seeking the benefit of a presumption carries the burden of establishing that presumption. Because the settlement was not a transaction between Berner and Krug, Berner has failed in its proof that it is entitled to the presumption it seeks. Therefore, the burden remained with Berner to show that Krug's inclusion in the settlement was a breach of Krug's fiduciary duty that caused Berner damages. (citations omitted)

A concurring opinion reaches the same result but considers the majority reasoning an "erroneous interpretation of what constitutes a [business] transaction [with a client]" that has "implications for future attorney discipline cases." The concurrence notes:

Krug appears to have entered a transaction, which was also entered by Berner. Both Krug and Berner signed the settlement agreement. Although the settlement agreement was not between Krug and Berner, Krug entered the transaction with Berner. In effect, the majority sub silencio alters the text of this attorney discipline rule and appears to limit the prohibition to only those situations where the transaction is between the attorney and client.

The significance of the majority's misstep is that it narrows the application of SCR 20:1.8(a). The word "between" means that two parties are involved whereas the word "with" encompasses an unlimited number of parties.

By altering the text of the rule, the majority appears to apply this conflicts of interest prohibition only to situations where there is a transaction between a lawyer and a client. The result of such a narrow application is that it may leave clients unprotected and lawyers unregulated in situations where multiple parties are involved and actual conflicts of interest exist.

All this because litigation counsel sued for unpaid fees. (Mike Frisch)


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