Attorney breached fiduciary duty

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A Wisconsin attorney will not have to pay punitive damages to former clients who successfully sued him for breach of fiduciary duty.

Because the clients sought and received rescission of their contract, rather than compensatory damages, the Wisconsin Supreme Court on June 24 held that punitive damages are unavailable.

New London attorney Michael G. Trewin represented Francis and Karen Groshek when they filed for bankruptcy in March 2004.

In July, they fell behind on their Chapter 13 payments. The same month, the Supreme Court suspended Trewin’s law license, effective Aug. 31.

In August, Trewin proposed that he buy the Groshek’s farm, and allow them to lease it from him with an option to repurchase. On Aug. 30, the Grosheks signed a waiver of conflict of interest and an agreement to sell the property to him.

In November, they closed on the sale, with Trewin paying $94,500 for the home and 34 acres. When the Groseks stopped making rent payments, Trewin cancelled the lease.

The Grosheks then sued Trewin for breach of fiduciary duty, seeking rescission of the conveyance. Portage County Circuit Court Judge Thomas T. Flugaur found that Trewin breached his fiduciary duty to the Grosheks, granted rescission upon payment to Trewin of $96,872, and awarded punitive damages.

The Court of Appeals affirmed the finding of breach of fiduciary duty, but reversed the punitive damages. The Wisconsin Supreme Court affirmed, in an opinion by Justice N. Patrick Crooks. Chief Justice Shirley S. Abrahamson dissented in part, concluding that punitive damages should be recoverable.

Fiduciary duty

The court held that Trewin breached his fiduciary duty because he entered into a contract with clients without fully disclosing that the contract would benefit him and potentially disadvantage them.

The court also found that the breach caused damage to the Grosheks. Evidence was presented that Trewin paid less than fair market value for the property. The circuit court found that the property was worth $180,000, yet Trewin purchased it for only $94,500.

Accordingly, the court affirmed the circuit court’s decision to grant rescission of the contract.

Punitive damages

However, the court held that the Court of Appeals properly reversed the punitive damage award, because no compensatory damages were awarded.

In Tucker v. Marcus, 142 Wis.2d 425, 439, 418 N.W.2d 818 (1988), the Court held that, “punitive damages are not available where there has been no ‘award’ of actual damages.”

Because no compensatory damages were sought or awarded, the court held, “our holding in Tucker forecloses recovery of punitive damages in a case where there is no award of compensatory damages.”

The dissent

Chief Justice Abrahamson agreed that Trewin breached his fiduciary duty to the Grosheks, but dissented from that part of the majority opinion concluding that punitive damages are not available.

Abrahamson argued that the term “actual damages” in Tucker is broad enough to include rescission: “From my perspective, the actual damages requirement means that the claimant must establish a cause of action, whether at law or in equity, before punitive damages can be awarded. Once there is a valid cause of action and thus a legally cognizable harm, no reason exists to deny punitive damages merely because the claimant’s relief is not pecuniary.”

Case analysis

The rule in Tucker creates an arbitrary incentive for plaintiffs who want to recover punitive damages to seek compensatory damages, rather than rescission.

The Grosheks clearly could have recovered compensatory damages had they chosen to seek them instead of rescission. Instead of recovering their property, they could have sought and received the difference between what Trewin paid them for the property and its fair market value.

Had they done so, they then could have kept the punitive damage award, too. So, plaintiffs attorneys need to be aware that, all things being equal, compensatory damages, rather than rescission, is the much better remedy.

In some cases, parties may still prefer rescission as a remedy. But they need to know that they are limiting their options by doing so.