By Joe Forward, Legal Writer, State Bar of Wisconsin

June 30, 2010 – Claimants satisfied the elements of a claim for breach of fiduciary duty against their former attorney, but the equitable remedy precluded an award of punitive damages, the Wisconsin Supreme Court recently held.

In Groshek v. Trewin, 2010 WI 51 (June 24, 2010), the supreme court affirmed the appeals and circuit court rulings that an attorney breached a fiduciary duty to his client that warranted the rescission of a real estate contract between the parties, but held that punitive damages were not available where there is no award of compensatory damages.

In March of 2004, an attorney represented his clients in a Chapter 13 bankruptcy filing. In July, the supreme court suspended the attorney’s law license, effective Aug. 31, 2004.

On Aug. 30, 2004, the court explained, the client signed two documents drafted by the attorney – a conflict of interest waiver and an agreement to sell their home and 34 acres to the attorney for $94,500, with an option to purchase. The actual conveyance occurred in November of 2004.

The client then signed a lease agreement to live on the property, but stopped making rent payments. The attorney, now landlord, terminated the lease.

The client sought rescission of the conveyance based on a breach of fiduciary duty, and added a claim for punitive damages. The attorney counterclaimed for eviction and rent due. The circuit court granted rescission and the appeals court affirmed.

The record revealed that the attorney did not make full disclosures of all the particulars of the transaction, and used information from prior representation to negotiate the deal knowing it would be difficult for the client to make future rental payments.

In an opinion by Justice N. Patrick Crooks, the supreme court explained that to satisfy a claim for breach of fiduciary duty, there must be a duty, a breach, and the breach must cause the damage. These elements were satisfied based on the facts found, the court held.

Fiduciary duty owed

The attorney argued that attorneys do not have fiduciary duties to former clients, and the clients were former clients when the property was conveyed in November.

The clients argued that the attorney remained their attorney well after Aug. 31, 2004, the date his law license was suspended. They also argued that agency law and the rules of professional conduct impose obligations that supported a breach of fiduciary duty claim.

The supreme court stated: “We need not determine precisely when the attorney-client relationship ceased … an attorney has a fiduciary duty to an existing client, and until at least Aug. 31, 2004, the [clients] were undisputedly [this attorney’s] clients.”

Duty breached

In affirming that the attorney breached a fiduciary duty, the supreme court noted that agreements drafted by the attorney lacked details, and that a letter from the attorney to his lender made representations not disclosed to his client, who did not clearly understand the transaction.

Citing the appeals court opinion, which stated that the attorney “used his position of influence and the trust” of his client to seal the transaction, the supreme court explained that the attorney’s conduct “is hard to reconcile with the fiduciary duty of loyalty” as defined in Zastrow v. Journal Communications, Inc., 291 Wis. 2d 426, 718 N.W.2d 51 (2006).

The court further held that under Zastrow, “entering into a contract with a client ‘without full disclosure that the contract will benefit the lawyer and potentially disadvantage the client,’” constitutes a breach of the specific fiduciary duty of loyalty.

Breach caused damage

The attorney argued that there was no damage because their own financial difficulties would have caused the client to lose the house anyway, whether the attorney was the buyer or not. But the client argued that because of the attorney’s actions, they received less than was possible.

The supreme court concluded that since the attorney took advantage of trust and information “to gain their signatures on the agreement to sell, the agreement itself gave rise to the injury” and rescission is an appropriate remedy when fiduciary duties are breached.

No punitive damages

The client argued that punitive damages should not be barred because the attorney acted “maliciously” and “intentionally disregarded their rights,” a requirement for punitive damages under Wis. Stat. section 895.043(3).

But the supreme court relied on Tucker v. Marcus, 142 Wis. 2d 425, 418 N.W.2d 818 (1988), to determine that section 895.043(3) does not come into play unless there is first an award for compensatory damages. The court concluded that Tucker “forecloses recovery of punitive damages in a case where there is no award of compensatory damages.”

Notes

Chief Justice Shirley S. Abrahamson dissented in part, concluding that “punitive damages are not precluded in an action in equity and that an award of nonpunitive money damages is not a prerequisite for an award of punitive damages when the claimant has suffered actual damages.”

Attorneys

Gary Dreier and Eric Johnson of First Law Group S.C., Stevens Point, represented Francis and Karen Groshek.  Mark Steichen of Boardman, Suhr, Curry & Field LLP, Madison, represented attorney Michael Trewin.