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    Ethics Rule Violation Saves Menard CEO in Appeal by Former Lawyer, Ex-Fiancé

    Joe Forward

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    Diverging Roads

    Sept. 23, 2016 – John Menard Jr., CEO of the home improvement giant Menard Inc., and affiliates recently fended off an appeal from Menard’s ex-fiancé, a Minnesota lawyer who claimed she was not paid for legal services valued in the millions of dollars.

    In Sands v. Menard, 2012AP2377 (Sept. 20. 2016), a three-judge panel for the District III Court of Appeals ruled that Sands’ claims were barred because she violated an ethics rule that regulates business transactions between lawyers and clients.

    What Happened?

    Debra Sands, a 1993 graduate of William Mitchell College of Law in St. Paul, began dating Menard in 1997. Her complaint alleged that she moved in with him in 1998, and they became engaged to be married four months later. Menard denied that they lived together, but admitted that they were engaged at one point. They broke up in 2006.

    Sands is the sister of Dawn Sands, who served as Menard Inc.’s general counsel for a period of time and had her own legal fights with Menard in recent years. Menard terminated Dawn Sands’ employment in 2006 and she sued for unlawful retaliation.

    Before this happened, Debra Sands performed work for Menard and his companies as an outside counsel. She alleged that she was never paid for much of her legal work, and was not paid for non-legal (business-related and home-related) work either.

    While Debra alleged that she did not perform legal services for Menard until 2003, Menard claimed that an attorney-client relationship was formed in 1997.

    The record showed that Prima Group, which Sands owned with her sister, sent Menard an invoice for “government relations and legal services” in 1998. Sands said this was a sham payment – he had offered to help her with outstanding student loans, and told her to invoice the amount as “legal services,” which are tax deductible business expenses.

    Menard did agree that Sands began doing legal work for Menard and Menard Inc. in 2003. Invoices showed that Sands was billing at $145 per hour. The record showed that billings between 2003 and 2004 totaled about $152,000 and Menard paid that amount.

    When the relationship ended in 2006, Menard told Sands to submit a bill for unpaid legal services dating back to 2003. Sands submitted 190 invoices totaling nearly 7,500 hours. At $145 per hour, Sands’ final legal bill amounted to more than $1 million.

    Menard offered to pay the amount if Sands signed a “release of all claims,” including a waiver of any “quasi-marital claims.” Sands refused to sign, and Menard refused to pay.

    Lawsuit

    Sands sued Menard and trustees of a trust Menard created in 2002 under theories of unjust enrichment, breach of contract, and promissory estoppel.

    She sought “a fair and reasonable share of the property, wealth, and increased net worth acquired by Menard through [Sands’] efforts” and “judgment in an amount equal to the fair and reasonable value of the substantial … benefits” she provided to trustees.

    Joe ForwardJoe Forward, Saint Louis Univ. School of Law 2010, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6161.

    Menard counterclaimed for breach of fiduciary duty. He also argued that Sands was barred from recovering a portion of his assets because she violated Wisconsin Supreme Court Rule 20:1.8(a) under the Rules of Professional Conduct for Attorneys.

    That rule says a lawyer cannot “enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

    · 1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

    · 2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

    · 3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.”

    The trustees also argued that Sands did not allege that she provided any services to the trustees and could not establish the value of her alleged contributions.

    The circuit court ruled that SCR 20:1.8(a) does not bar an attorney’s claim to a client’s money or property if “the attorney and client had a romantic relationship that pre-dated their attorney-client relationship” and “the legal services rendered by the attorney were ‘merely ancillary or incidental’ to the parties larger joint enterprise.”

    But the circuit court found that the romantic relationship between Menard and Sands did not predate the formation of the attorney-client relationship; Sands sent legal billing invoices starting in 1997, and the romantic relationship started in 2003.

    The circuit court rejected Sands’ claim that the 1997 invoices were disguised so Menard could take a tax deductible business expense, rather than pay a gift tax for paying her student loans. Even accepting those facts as true, the court noted, Sands participated in the fraud. That is, she came to court with unclean hands, preventing recovery.

    The circuit court also concluded that the legal services rendered were not merely ancillary or incidental – the invoices were close to $1 million in legal billings. Sands did not appeal an adverse ruling for compensation on non-legal matters.

    She also did not appeal an adverse ruling on her “quantum meruit” claim. She wanted her hourly rate calculated between $355 and $640 per hour – rather than the $145 per hour stated on invoices. That would have raised the bill between $2.4 and $4.3 million.

    SCR Rule 1.8(a), Unjust Enrichment, Breach of Contract

    On appeal, Sands claimed that she was entitled to ownership interests in Menard’s businesses as compensation for legal services, as promised. Menard breached a contract with her and unjustly enriched himself by not paying, Sands argued.

    But the three-judge panel agreed that Sands violated SCR 20:1.8(a), and the violation barred her equitable claim to any ownership interest in Menard’s businesses.

    That is, she could not receive ownership interests as compensation, because the record showed that she did not meet the requirements of SCR 1.8(a), which requires the attorney provide full disclosures about the transaction and obtained informed consent.

    “Sands affirmatively alleges that she entered into an agreement to provide legal services to Menard in exchange for an interest in his businesses, and she does not dispute that she failed to provide the disclosures required by Rule 1.8(a) and to obtain Menard’s written consent to the transaction,” wrote Appeals Court Judge Lisa Stark.

    The panel rejected Sands’ claim that attorney ethics rule violations can only be considered in attorney discipline cases.

    “Contrary to Sands’ assertion, the preamble to the Rules of Professional Conduct and the cases cited above do not establish that the Rules of Professional Conduct can never be considered outside the attorney disciplinary context,” wrote Judge Stark, explaining that a party seeking recovery in equity “must come to court with clean hands.”

    The panel also rejected Sands’ claim that Menard waived the right to raise the Rule 1.8(a) violation, finding no authority that a client’s alleged ratification of an agreement after the violation has occurred precludes the client from raising the violation.

    Sands also argued that Menard was unjustly enriched, benefitting from her legal and non-legal work while the two allegedly cohabitated.

    She cited one case – Watts v. Watts, 137 Wis. 2d 506, 405 N.W.2d 303 (1987), in which one cohabitant was allowed to pursue an unjust enrichment claim against the other.

    “However, unlike Sands, the plaintiff in Watts was not an attorney and was therefore not subject to the requirements of Rule 1.8(a),” Judge Stark explained.

    “There is no exception to Rule 1.8(a) for attorneys who cohabitate with their clients, and we decline Sands’ invitation to read Watts as establishing such an exception.”

    Sands argued that barring an unjust enrichment claim in her case would mean no lawyer could ever bring an unjust enrichment claim against a former cohabitant.

    “[T]hat is not the case,” Judge Starks wrote. “We merely hold that an attorney cannot bring an unjust enrichment claim under Watts to recover an ownership interest in a former cohabitant’s business (or equivalent damages) as compensation for legal services, unless the attorney complied with Rule 1.8(a).”

    The panel also ruled that Sands did not sufficiently plead her breach of contract claim because she did not “identify the amount or value of the ownership interest Menard agreed to give Sands, or even in which entity or entities he agreed to give her an ownership interest.” That is, she failed to identify the consideration with specificity.

    The appeals court also affirmed the circuit court’s dismissal order with regard to claims against the trustees. Sands alleged the trustees obtained benefits from her unpaid work.

    The panel confirmed that claims against the trustees of a trust cannot survive if there is no avenue of recovery against the principal (Menard).

    Breach of Fiduciary Duty

    Menard Inc., also a defendant, appealed a summary judgment order that extinguished Menard Inc.’s breach of fiduciary duty counterclaim against Sands.

    But the appeals court affirmed, concluding that the breach of fiduciary duty claim was barred by a two-year statute of limitations.

    Menard Inc. claimed that Sands breached her duty when representing the company in a transaction involving the formation of an equity fund. Menard Inc. had created a wholly-owned subsidiary, which invested more than $300 million in the private equity fund.

    The fund was to be managed by MH Managing Member LLC, a company owned by John Menard’s friend, Stephen Hilbert and his wife.

    Sands negotiated the terms of the transaction with Hilbert and drafted the legal documents. She billed 754 hours, at $145 per hour, amounting to about $109,000 in legal fees.

    Menard Inc. alleged that Sands tried to obtain a 20 percent ownership interest in the entity created to manage the private equity fund, and also alleged that Sands disclosed confidential information to the fund manager “to ensure the transaction would close.”

    That is, she was advocating for the deal to close despite concerns raised by Menard Inc.’s chief financial officer (CFO), an accountant, and John Menard himself.

    Menard Inc. also alleged that after the deal closed, Sands received payments from Hilbert, the fund manager, without disclosing them Menard Inc., the client. Sands, in a deposition, said a $15,000 payment from a Hilbert trust was a “bonus.”

    The record also showed that after the transaction closed, Hilbert named Sands as the fund’s general counsel, and she received $180,000 over a 17-month period as GC.

    This all happened in 2005. Menard Inc. filed the counterclaim in 2008. Thus, Sands argued that the applicable statute of limitations, Wis. Stat. 893.57, barred the claim.

    “We agree with Sands that, as of September 1, 2005, Menard Inc., had enough information that it should have, with reasonable diligence, discovered the alleged breach of Sands’ fiduciary duties,” Judge Stark wrote.

    The panel pointed to testimony from Menard in a 2005 deposition and other record evidence that demonstrated Menard was questioning Sands’ loyalty to him. He said he suspected that Hilbert, Sands, and Sands’ sister were conspiring against him.

    “By doing nothing in the face of these suspicions, Menard, Inc., failed to exercise reasonable diligence to discover the alleged breach of Sands’ fiduciary duties,” wrote Judge Stark, noting that suspicions alone can trigger a duty to investigate.