Guilty plea bars malpractice claim

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A client’s guilty plea bars her from bringing a malpractice action against her attorney, the Wisconsin Court of Appeals held on Feb. 26.

Patricia Mrozek, a financial advisor and securities agent, retained the law firm of Mallery & Zimmerman, S.C., to assist her in forming PMI, a corporation formed to construct and operate a motel.

After hiring the Mallery firm, Mrozek began soliciting investments in the project, obtaining loans from 20 or more individuals totaling over $500,000. Construction began, although no institutional financing was ever acquired.

While obtaining financing, Mro-zek’s securities agent license was revoked by the Wisconsin Commiss-ioner of Securities for actions in the sale of unrelated investments.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 the corporation and filed it with the commissioner’s office for approval. The commissioner 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.

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

Mrozek was later charged with 13 felony counts for willfully failing to disclose material facts in connection with the project. Pursuant to a plea agreement, she pleaded guilty to two counts of felony securities fraud, and three counts of misdemeanor theft by fraud.

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.

PMI then filed for bankruptcy, listing a claim against the Mallery firm for malpractice as an asset of the corporation, but also identifying the firm as an unsecured creditor of the corporation for its unpaid legal bills.

The appointed trustee chose not to pursue the claim against Mallery, and the estate was ordered closed.

Mrozek and PMI then commenced a legal malpractice action against Mallery. Portage County Circuit Court Judge Frederic W. Fleishauer granted summary judgment to Mallery, holding that, under the doctrine of issue preclusion, her guilty plea barred Mrozek from pursuing a malpractice claim against the Mallery firm for any damages arising out of her criminal conviction.

Fleishauer also granted summary judgment dismissing PMI’s claim, 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. Mrozek appealed, but the court of appeals affirmed in a decision by Judge David G. Deininger.

Issue Preclusion

The court agreed that the doctrine of issue preclusion barred Mrozek’s legal malpractice claim, because she had pleaded guilty in the criminal case.

The issue — one of first impression — was whether the legal or factual question had been “actually litigated” in the prior action. The court held that a guilty plea can satisfy the requirement if
three factors are met: (1) the guilty plea is knowingly and voluntarily entered; (2) the criminal court ascertains that a factual basis exists for the plea; and (3) the court accepts the plea and enters a judgment of conviction.

The court acknowledged that, in Crowall v. Heritage Mut. Ins. Co., 118 Wis.2d 120, 346 N.W.2d 327 (Ct.App.1984), it observed that, while a fully litigated criminal conviction satisfies issue preclusion requirements, a plea of guilty or no contest “does not draw any issues into controversy and does not support the use of [issue preclusion].”

However, in Michelle T. v. Crozier, 173 Wis.2d 681, 495 N.W.2d 327 (1993), the Supreme Court dismissed the statement as mere dicta, and the court of appeals agreed with that assessment.

The court noted that the issue in Crowall was whether a criminal conviction based on a jury verdict could be used to preclude the convicted defendant from pursuing a civil claim whose success depended on relitigating an issue that had been resolved against the defendant in the criminal proceeding.

The court concluded, “Because the question before us now was not presented by the facts in Crowall, we had no reason to address whether a judgment based on a guilty plea can be said to meet the ‘actually litigated’ requirement for applying issue preclusion. We, like the supreme court, view our Crowall footnote as dicta.”

Reviewing the law in other jurisdictions, the court adopted the reasoning of courts in Missouri and Iowa, James v. Paul, 49 S.W.3d 678 (Mo.2001), and Ideal Mut. Ins. Co. v. Winker, 319 N.W.2d 289 (Iowa 1982), which permitted the application of issue preclusion to convictions based on guilty pleas.

Noting the inquiries that a court must make to ensure the validity and integrity of a guilty plea, the court concluded, “It is clear that before a Wisconsin criminal court may accept a guilty plea, it must determine that the defendant’s admitted conduct constitutes the offense to which the defendant has pled guilty. We conclude that the judicial determination of the existence of a factual basis for a guilty plea, together with a court’s finding that the plea was entered knowingly and voluntarily, are sufficient to satisfy the requirement that issues be actually litigated in order for issue preclusion to be applied (cite omitted).”

Because there was no evidence that Mrozek’s plea did not comport with standard procedures for a guilty plea in Wisconsin, the court found it was not unfair to preclude her from relitigating the issue of her guilt. Thus, for purposes of the present action, the court held it established that Mrozek knowingly made false representations to purchasers of the bonds without intent to defraud them.

The court then turned to the consequences of that holding, and concluded that public policy should preclude the legal malpractice action, relying on the reasoning of Evans v. Cameron, 121 Wis.2d 421, 360 N.W.2d 25 (1985).

In Evans, the plaintiff alleged that her former attorney advised her to lie under oath at a bankruptcy hearing, which she did, triggering a perjury prosecution. Rejecting a malpractice action against that attorney, the court held that, because the wrongfulness of lying under oath is apparent, “A court should not encourage others to commit illegal acts upon their lawyer’s advice by allowing the perpetrators to believe that a suit against the attorney will allow them to obtain relief from any damage they might suffer if caught.”

Applying the same reasoning, the court of appeals concluded that Mrozek must be barred from recovering damages from Mallery, stating, “it is established for purposes of this proceeding that Mrozek knowingly made false representations to note purchasers, intending to deceive and defraud them. We conclude that the wrongfulness of these acts is every bit as apparent as the wrongfulness of lying under oath. Even if negligent or inaccurate advice by the Mallery firm contributed to the course of conduct that resulted in Mrozek’s prosecution and conviction, her admitted wrongdoing placed her, at a minimum, in pari delicto with the defendant law firm.

The trial court did not err in dismissing this portion of her claim against the Mallery firm.”

Claim Preclusion

The court also held that PMI’s claims for damages against the firm are barred by the doctrine of claim preclusion, because the trustee abandoned the claims in the bankruptcy action.

Claim preclusion bars relitigation of the same claim when three requirements are met: (1) there is an identity of parties or their privies in the prior lawsuit; (2) there is an identity of claims for relief that were brought, or could have been brought; and (3) a final judgment on the merits in a court of competent jurisdiction resolved the first lawsuit.

The court relied on a decision by the Fifth Circuit, Bank of Lafayette v. Baudoin, 981 F.2d 736 (5th Cir. 1993), which held that the requirements for claim preclusion were met, even though the trustee elected not to pursue a claim in bankruptcy.

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The court distinguished several cases cited by PMI, in which courts held that, when a trustee abandons a claim, the right to pursue it vests in the debtor as though the bankruptcy proceeding never occurred.

The court noted that the issue in those cases was not claim preclusion, but standing. In contrast, other courts have found that, although such a claim revests in the debtor, it is subject to claim preclusion, in the absence of a specific reservation of the debtor’s right to pursue it.

Accordingly, the court affirmed the application of claim preclusion to dismiss PMI’s claims, stating, “the present record discloses no express exception or reservation granted in PMI’s bankruptcy proceedings that would allow it to pursue the Mallery malpractice claim post-bankruptcy. Because the Mallery firm presents persuasive authority for the application of claim preclusion on the present facts, and PMI has failed to distinguish or refute that authority, we conclude that when the malpractice claim against the Mallery firm revested in PMI upon the closing of PMI’s Chapter 7 bankruptcy, it did so subject to the claim preclusion bar.”

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David Ziemer can be reached by email.