Title: Patricia Mrozek v. Intra Financial Corporation

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

2005 WI 73 
 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
2002AP2448 
COMPLETE TITLE: 
 
 
Patricia Mrozek and Plover Motel, Inc.,  
          Plaintiffs-Appellants-Petitioners, 
     v. 
Intra Financial Corporation and James Graves,  
          Defendants, 
Mallery & Zimmerman, S.C.,  
          Defendant-Respondent. 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
2004 WI App 43 
Reported at:  271 Wis. 2d 485, 678 N.W.2d 264 
(Ct. App. 2004-Published) 
 
 
OPINION FILED: 
June 9, 2005   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
March 1, 2005   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
Portage   
 
JUDGE: 
Frederic Fleishauer   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
ROGGENSACK, J., concurs (opinion filed).   
 
DISSENTED: 
        
 
NOT PARTICIPATING:         
 
 
 
ATTORNEYS: 
 
For the plaintiffs-appellants-petitioners there were briefs 
by Elizabeth R. Olson, William P. Skemp and William Skemp Law 
Firm, S.C., LaCrosse, and oral argument by William P. Skemp. 
 
For the defendant-respondent there was a brief by Ross A. 
Anderson, Barbara J. Janaszek and Whyte Hirschboeck Dudek S.C., 
Milwaukee, and oral argument by Ross A. Anderson. 
 
 
2005 WI 73
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  2002AP2448  
(L.C. No. 
1999CV135) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
Patricia Mrozek and Plover Motel, Inc., 
 
          Plaintiffs-Appellants-Petitioners, 
 
     v. 
 
Intra Financial Corporation and James Graves, 
 
          Defendants, 
 
Mallery & Zimmerman, S.C., 
 
          Defendant-Respondent. 
 
 
 
FILED 
 
JUN 9, 2005 
 
Cornelia G. Clark 
Clerk of Supreme Court 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Affirmed in 
part; reversed in part and cause remanded.   
 
¶1 
PATIENCE DRAKE ROGGENSACK, J.   Patricia Mrozek and 
Plover Motel, Inc. (PMI) seek review of a court of appeals 
decision affirming the circuit court's1 grant of summary judgment 
to Mallery & Zimmerman, S.C. (Mallery) dismissing Mrozek's and 
                                                 
1 The 
circuit 
court 
of 
Portage 
County, 
Frederic 
W. 
Fleishauer, Judge, initially decided the motion for summary 
judgment. 
No. 
2002AP2448  
 
2 
 
PMI's claims for the negligent provision of legal services.  We 
conclude that the circuit court correctly granted summary 
judgment dismissing the claim of PMI for lost profits, as well 
as Mrozek's claim for lost management fees that was dependent on 
PMI's claim for lost profits.  However, we conclude that it was 
error to dismiss Mrozek's and PMI's other claims.  Accordingly, 
we affirm in part, reverse in part and remand to the circuit 
court for further proceedings on Mrozek's and PMI's remaining 
claims based on the allegedly negligent provision of legal 
services. 
I.  BACKGROUND2 
¶2 
Mrozek wanted to build a motel in Plover, Wisconsin 
and obtain an AmericInn franchise for it.  She retained Mallery 
in June of 1992 to provide legal advice in forming a corporation 
that would construct and operate the motel, in financing the 
hotel construction and in negotiating with AmericInn Motel for a 
franchise.   
¶3 
Mallery drafted the articles of incorporation for PMI, 
which was incorporated August 25, 1992.  Mrozek estimated the 
cost of constructing the motel at approximately $2.8 million.  
She hoped to finance the project in part through a private stock 
                                                 
2 The facts set out below are taken largely from the 
complaint and from Mrozek's affidavit submitted in opposition to 
Mallery's motion for summary judgment.  They are taken as true 
only for purposes of reviewing the summary judgment decision 
before us.  See Prah v. Maretti, 108 Wis. 2d 223, 228-29, 321 
N.W.2d 182 (1982). 
No. 
2002AP2448  
 
3 
 
offering, the offering memorandum for which she asked Mallery to 
draft, and in part through an institutional loan.   
¶4 
Between August 1992 and February 1993, Mrozek obtained 
investment loans totaling more than $500,000 from approximately 
20 individuals.  Mrozek represented to these investors that the 
loans would be used for the construction of the motel, which 
would ultimately generate a 10% return on their investments.  
When each loan was made, the investor received a note promising 
PMI would repay the principal of the loan, plus interest, within 
a specified time.   
¶5 
Mrozek alleges that Mallery knew of these initial 
notes, but that Mallery did not inform her that her solicitation 
of these private investment loans violated Wisconsin laws.  
Instead, Mrozek says that Mallery agreed to draft replacement 
notes for the private investors, which notes were to be secured 
by mortgages on the motel property that Mallery would record 
with the Portage County Register of Deeds.  Apparently, Mallery 
did draft replacement notes and mortgages, but Mrozek alleges 
that Mallery did not timely record the mortgages, causing the 
mortgages to become worthless as security for the investors' 
loans.   
¶6 
On September 25, 1992, PMI purchased approximately 
three acres of property on which the motel was to be 
constructed. 
 
Mallery 
negotiated 
with 
Intra 
Financial 
No. 
2002AP2448  
 
4 
 
Corporation (IFC)3 to construct the motel for PMI, and assisted 
at the execution of the construction contract on October 10, 
1992.   
¶7 
Also as part of the services Mallery provided to 
Mrozek 
and 
to 
PMI, 
Mallery 
drafted 
a 
private 
placement 
memorandum to sell securities in PMI.  This private placement 
memorandum 
was 
filed 
with 
the 
Wisconsin 
Commissioner 
of 
Securities on February 5, 1993.  According to Mrozek, the 
memorandum was not accurately drafted, causing the Commissioner 
of Securities to initially reject it.  Additionally, after the 
memorandum was amended, she was unable to locate any purchasers 
who 
could 
meet 
the 
Commissioner's 
"investor 
suitability 
standards" that restricted who could invest in PMI based on the 
potential investor's net worth and income.  In late 1993, the 
Commissioner revoked all sales of PMI stock.   
¶8 
On February 19, 1993 when PMI's costs depleted the 
initial $500,000 raised and it became delinquent in payments to 
IFC, IFC sent a Notice of Intent to file a construction lien 
against the motel property, and on April 29, 1993, it filed a 
construction lien.  IFC then initiated a lawsuit to collect 
unpaid bills and to foreclose its lien. 
¶9 
In late 1993, Mallery withdrew from representing 
Mrozek and PMI.  However, prior to Mallery's withdrawal, Mrozek 
                                                 
3 Both IFC and James Graves, an individual associated with 
IFC, were originally named as defendants in this action, but 
were dismissed as parties.  The claims against IFC and Graves 
are not at issue here. 
No. 
2002AP2448  
 
5 
 
was charged with thirteen counts of willfully failing to 
disclose material facts under Wis. Stat. § 551.41(2) (2001-02),4 
in connection with PMI's sale of notes for the motel project.  
Mrozek obtained other counsel, and pursuant to a plea agreement, 
pled guilty to two counts of felony securities fraud under 
§ 551.41(2) and to three counts of misdemeanor theft by fraud, 
under Wis. Stat. § 943.20(1)(d).5  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 between Mrozek and the 
State.  
¶10 In 1994, because of a lack of funds to pay outstanding 
construction bills and complete the motel's construction, PMI 
filed a voluntary Chapter 11 bankruptcy.  The bankruptcy filing 
stayed a pending sheriff's sale of the motel property that had 
                                                 
4 All subsequent references to the Wisconsin Statutes are to 
the 2001-02 version unless otherwise noted.  Wisconsin Stat. 
§ 551.41(2) makes it unlawful in connection with the offer, 
sale, or purchase of securities, "to omit to state a material 
fact necessary in order to make the statements made, in the 
light of the circumstances under which they are made, not 
misleading."  The criminal complaint alleged that Mrozek 
violated § 551.41(2) by failing to inform each investor that:  
(1) the Commissioner had revoked her securities license; (2) IFC 
had filed a Notice of Intent to file a lien against PMI; and (3) 
PMI had not secured financing for construction of the motel from 
any source other than the individual investors. 
5 Wisconsin Stat. § 943.20(1)(d) makes it unlawful to 
"obtain[] title to property of another person by intentionally 
deceiving the person with a false representation which is known 
to be false, made with intent to defraud, and which does defraud 
the person to whom it is made." 
No. 
2002AP2448  
 
6 
 
been ordered in IFC's lien foreclosure action.  Schedules that 
PMI filed with its bankruptcy petition listed a claim against 
Mallery for the negligent delivery of legal services as an asset 
of PMI, and also identified Mallery as an unsecured creditor of 
PMI for unpaid legal bills.  However, Mallery never filed a 
proof of claim in the bankruptcy action.  Pursuant to a 
stipulation, the motel property and AmericInn franchise rights 
were transferred to IFC, who in turn transferred them to another 
corporation that operated the motel thereafter. 
¶11 IFC then moved to convert the bankruptcy from a 
Chapter 11 reorganization to a Chapter 7 liquidation, asserting 
that "because [PMI] no longer owns the Property, [PMI] has no 
assets of substance, no business, no income, cannot generate 
funds to pay various expenses, and is completely unable to 
effectuate a [reorganization] plan," as required under Chapter 
11. 
The 
bankruptcy 
court 
granted 
the 
motion 
over 
PMI's 
objection. The court appointed a trustee for the bankruptcy 
estate who would, in the words of the bankruptcy judge, "review 
the situation and determine . . . whether there were any assets 
which should be pursued."  The trustee chose not to pursue the 
scheduled claim against Mallery, but did unsuccessfully pursue a 
claim against IFC for "disgorgement" of excess profits.  The 
trustee then reported to the court that, after "diligent 
inquiry," there were "no assets in the estate" that were not 
either "inconsequential in value or burdensome to the estate." 
The trustee's report also recited that it constituted an 
"abandonment of all scheduled property of the bankruptcy 
No. 
2002AP2448  
 
7 
 
estate."  The bankruptcy court discharged all remaining debts 
against PMI and closed the estate. 
¶12 Mrozek and PMI 
thereafter 
commenced 
this 
action 
against Mallery, alleging in an amended complaint that the firm 
was negligent in its legal representation of both Mrozek and PMI 
and that Mallery also breached fiduciary duties it owed to them.6  
The circuit court granted summary judgment to Mallery on 
Mrozek's claim, concluding that her guilty plea precluded her 
malpractice claim against Mallery for any damages arising out of 
her criminal conviction.  The circuit court also granted summary 
judgment dismissing PMI's negligence claim against the law firm 
after concluding that the doctrine of claim preclusion prevented 
PMI from re-litigating a claim that could have been raised and 
resolved as a part of the bankruptcy proceedings.  Finally, the 
circuit court concluded that neither Mrozek nor PMI had made 
sufficient evidentiary submissions to support claims for damages 
based on future lost profits.  Mrozek and PMI appealed.   
¶13 The court of appeals affirmed the dismissal of all 
claims, but on slightly different grounds.  It first concluded 
that Mrozek's guilty pleas and subsequent criminal convictions 
resulted in issue preclusion of "any issues of fact or law 
                                                 
6 Mrozek and PMI refer on appeal only to their malpractice 
claims against Mallery. They do not argue that their claims, 
based on alleged breaches of the firm's fiduciary duties, should 
survive summary judgment, even if their professional negligence 
claims do not.  Accordingly, we refer in this opinion only to 
the claims against the law firm as alleging professional 
negligence. 
No. 
2002AP2448  
 
8 
 
necessarily encompassed" by Mrozek's criminal convictions, even 
though neither of the parties argued issue preclusion in the 
circuit 
court, 
the 
circuit 
court 
did 
not 
address 
issue 
preclusion and neither party argued issue preclusion on appeal.  
Second, it concluded that PMI's claims were barred by claim 
preclusion, holding that because any such claim was not 
proceeded upon by PMI's bankruptcy trustee, it was lost.  Third, 
the court of appeals affirmed the circuit court's dismissal of 
Mrozek's and PMI's claims for lost profits, agreeing that they 
had provided insufficient proof to go forward. 
II.  DISCUSSION 
A. 
Standard of Review 
¶14 We review a circuit court's decision granting summary 
judgment independently, but we apply the same methodology as the 
circuit court.  Smaxwell v. Bayard, 2004 WI 101, ¶12, 274 
Wis. 2d 
278, 
682 
N.W.2d 
923. 
 
Pursuant 
to 
Wis. 
Stat. 
§ 802.08(2), 
summary 
judgment 
"shall 
be 
rendered 
if 
the 
pleadings, 
depositions, 
answers 
to 
interrogatories, 
and 
admissions on file, together with the affidavits, if any, show 
that there is no genuine issue as to any material fact and that 
the moving party is entitled to a judgment as a matter of law." 
Therefore, "[s]ummary judgment should not be granted, 'unless 
the facts presented conclusively show that the plaintiff's 
action has no merit and cannot be maintained.'"  Smaxwell, 274 
Wis. 2d 278, ¶12 (quoting Goelz v. City of Milwaukee, 10 Wis. 2d 
491, 495, 103 N.W.2d 551 (1960)).  In determining whether 
summary judgment was appropriately granted, "[w]e view the 
No. 
2002AP2448  
 
9 
 
summary judgment materials in the light most favorable to the 
nonmoving party."  Id.  "In reviewing a circuit court's grant of 
summary judgment, this court will reverse the [circuit court] 
only if the circuit court incorrectly decided a legal issue or 
if material facts are in dispute."  Martin v. Milwaukee Mut. 
Ins. Co., 146 Wis. 2d 759, 766, 433 N.W.2d 1 (1988). 
¶15 Whether issue preclusion is a potential limit on 
litigation in an individual case is a question of law, on which 
we give no deference to the circuit court's decision.  Heggy v. 
Grutzner, 156 Wis. 2d 186, 192-93, 456 N.W.2d 845 (Ct. App. 
1990).  However, whether the circuit court properly applied, or 
refused to apply, issue preclusion in an individual case is a 
discretionary decision.  Paige K.B. v. Steven G.B., 226 Wis. 2d 
210, 219-23, 594 N.W.2d 370 (1999).  Additionally, whether claim 
preclusion was correctly applied by the circuit court is a 
question of law that we review de novo.  Lindas v. Cady, 183 
Wis. 2d 547, 552, 515 N.W.2d 458 (1994). 
B. 
Mrozek's Claims 
¶16 Mallery 
argues 
that 
Mrozek's 
guilty 
pleas 
and 
subsequent criminal convictions preclude her from proving that 
the firm's alleged negligence caused her to violate the law, 
which resulted in her prosecution, conviction and damages.  
Mallery agrees with the court of appeals decision that issue 
preclusion bars Mrozek's claims and that judicial estoppel also 
precludes her claims. 
No. 
2002AP2448  
 
10 
 
1. 
Issue preclusion 
¶17 Issue preclusion addresses the effect of a prior 
judgment on the ability to re-litigate an identical issue of law 
or fact in a subsequent action.  Northern States Power Co. v. 
Bugher, 189 Wis. 2d 541, 550-51, 525 N.W.2d 723 (1995).  In 
order for issue preclusion to be a potential limit on subsequent 
litigation, the question of fact or law that is sought to be 
precluded actually must have been litigated in a previous action 
and be necessary to the judgment.  Town of Delafield v. 
Winkelman, 2004 WI 17, ¶34, 269 Wis. 2d 109, 675 N.W.2d 470; 
Michelle T. v. Crozier, 173 Wis. 2d 681, 687, 495 N.W.2d 327 
(1993).  If the issue actually has been litigated and is 
necessary to the judgment, the circuit court must then conduct a 
fairness analysis to determine whether it is fundamentally fair 
to employ issue preclusion given the circumstances of the 
particular case at hand.  Paige K.B., 226 Wis. 2d at 220-21.  
For this analysis, the circuit court considers any of the 
following factors that are relevant to its decision:  (1) 
whether the party against whom preclusion is sought could have 
obtained review of the judgment; (2) whether the question is one 
of law that involves two distinct claims or intervening 
contextual shifts in the law; (3) whether there are apt to be 
significant differences in the quality or extensiveness of the 
two 
proceedings 
such 
that 
relitigation 
of 
the 
issue 
is 
warranted; (4) whether the burden of persuasion has shifted such 
that the party seeking preclusion had a lower burden of 
persuasion in the first trial than in the second; and (5) 
No. 
2002AP2448  
 
11 
 
whether matters of public policy or individual circumstances 
would render the application of issue preclusion fundamentally 
unfair, including whether the party against whom preclusion is 
sought had an inadequate opportunity or incentive to obtain a 
full and fair adjudication of the issue in the initial 
litigation.  Michelle T., 173 Wis. 2d at 688-89 (citing 
Restatement (Second) of Judgments § 28 (1980)).  Some of these 
factors are decided as questions of law, e.g., factors 1, 2 and 
4.  Paige K.B., 226 Wis. 2d at 223-24.  Other factors require 
the circuit court to exercise its discretion, for example, 
factors 3 and 5.  Id. at 225. 
¶18 In this case, Mallery contends that Mrozek's guilty 
pleas fulfill the requirement that the issue of whether Mallery 
provided satisfactory legal advice for tasks relating to the 
construction and financing of the motel actually has been 
litigated.  We have never squarely confronted the question 
whether issue preclusion may apply as a consequence of a guilty 
plea.7  However, after reviewing a wide range of authorities, we 
                                                 
7 We agree with Mallery that language in Crowall v. Heritage 
Mutual Insurance Co., 118 Wis. 2d 120, 346 N.W.2d 327 (Ct. App. 
1984), disallowing the use of issue preclusion following a 
guilty plea, is dicta and therefore not controlling.  That 
decision held that issue preclusion can apply following a fully 
litigated criminal conviction, even if the parties in the 
subsequent action are not identical to the parties in the 
criminal case.  Id. at 124.  A footnote in that decision stated, 
"A plea of guilty or nolo contendere in the criminal suit does 
not draw any issues into controversy and does not support the 
use of collateral estoppel."  Id. at 122 n.2.  We stated in 
Michelle T. v. Crozier, 173 Wis. 2d 681, 687 n.7, 495 N.W.2d 327 
(1993), that the footnote in Crowall was dicta.    
No. 
2002AP2448  
 
12 
 
conclude that issue preclusion is not available based on 
Mrozek's guilty pleas. 
¶19 There is conflict among jurisdictions on the effect a 
guilty plea has on the availability of issue preclusion.  The 
court of appeals relied on decisions from Iowa and Missouri in 
concluding that issue preclusion could apply following a guilty 
plea.  See James v. Paul, 49 S.W.3d 678, 686-88 (Mo. 2001) 
(observing that jurisdictions "have split fairly evenly, the 
recent trend being to apply [issue preclusion] defensively in a 
civil proceeding following a plea of guilty"); see also Ideal 
Mut. Ins. Co. v. Winker, 319 N.W.2d 289, 294-96 (Iowa 1982).  
The reasoning behind this view is that before a guilty plea is 
accepted, the circuit court must ascertain that there is a 
factual basis for the plea.  See, e.g., State v. Bangert, 131 
Wis. 2d 246, 266-67, 389 N.W.2d 12 (1986).  Wisconsin statutes 
also require that a criminal court undertake this analysis.  
Wisconsin Stat. § 971.08(1) provides in part: 
(1) Before the court accepts a plea of guilty or 
no contest, it shall do all of the following: 
(a) 
Address 
the 
defendant 
personally 
and 
determine that the plea is made voluntarily with 
understanding of the nature of the charge and the 
potential punishment if convicted. 
(b) Make such inquiry as satisfies it that the 
defendant in fact committed the crime charged. 
¶20 However, many states hold the opposite view, that a 
plea agreement is qualitatively different from a conviction 
following a trial.  See, e.g., Rawling v. City of New Haven, 537 
No. 
2002AP2448  
 
13 
 
A.2d 439 (Conn. 1988); Prudential Prop. & Cas. Ins. Co. v. 
Kollar, 578 A.2d 1238, 1240-41 (N.J. Super. Ct. App. Div. 1990).  
These states are supported by the Restatement (Second) of 
Judgments § 85 cmt. b, which states:  
b. 
Actual adjudication.  The rule of this 
Section presupposes that the issue in question was 
actually litigated in the criminal prosecution. See § 
27, Comment e.  Accordingly, the rule of this Section 
does not apply where the criminal judgment was based 
on a plea of nolo contendere or a plea of guilty. A 
plea of nolo contendere by definition obviates actual 
adjudication and under prevailing interpretation is 
not an admission. A defendant who pleads guilty may be 
held to be estopped in subsequent civil litigation 
from contesting facts representing the elements of the 
offense. However, under the terms of this Restatement 
such an estoppel is not a matter of issue preclusion, 
because the issue has not actually been litigated, but 
is a matter of the law of evidence beyond the scope of 
this Restatement.  
Also, 18B C. Wright & A. Miller, Federal Practice & Procedure, 
§ 4474.1 (3d ed. 2002) states: 
The desire to avoid a civil adjudication that is 
inconsistent with a plea-based conviction should not, 
in principle, go beyond use in evidence or judicial 
estoppel to reach issue preclusion. The conviction 
does not rest on actual adjudication or determination 
of any issue.  Just as issue preclusion should not 
rest on civil judgments by consent, stipulation, or 
default, so it should not rest on a plea of guilty. 
¶21 Ultimately, our determination depends not on the 
number of jurisdictions or authorities supporting a view, but 
rather on the persuasiveness of each position.  We conclude that 
the following statement from the New Jersey Superior Court 
properly explains why applying issue preclusion should not be 
available based on a guilty plea: 
No. 
2002AP2448  
 
14 
 
[A guilty plea] represents the decision of the 
defendant "to forego such litigation and usually for 
reasons having little or nothing to do with the nature 
of the issues."  . . .  The motives for the State and 
a criminal defendant to make a plea agreement are 
many. The State may be seeking to conserve its scarce 
resources by avoiding a trial and a defendant may be 
attempting to secure his freedom or at least a reduced 
term of incarceration. Such reasons have little or 
nothing to do with the determination of the issues in 
the [later action]. 
Kollar, 578 A.2d at 1240-41.  While a Wisconsin circuit court 
must make an inquiry sufficient to satisfy it that the defendant 
committed the crime before accepting the plea, such an inquiry 
is not the same as a fully litigated trial between adversarial 
parties resulting in the fact-finder determining that the facts 
prove the defendant committed the crime.  For example, a circuit 
court may satisfy its obligation of inquiry under Wis. Stat. 
§ 971.08(1)(b) by incorporating by reference the facts adduced 
at the preliminary hearing.  State v. Duychak, 133 Wis. 2d 307, 
315, 395 N.W.2d 795 (Ct. App. 1986).  Furthermore, a defendant 
who pleads guilty need not admit the facts of a crime that has 
been charged as a precondition to a court accepting his or her 
plea.  State v. Thomas, 2000 WI 13, ¶18, 232 Wis. 2d 714, 605 
N.W.2d 836.  Therefore, we conclude that Mrozek's guilty pleas 
do not fulfill the "actually litigated" requirement for issue 
preclusion.  
2. 
Judicial estoppel/public policy 
¶22 Alternatively, Mallery urges us to conclude that 
Mrozek's negligence claim is barred by judicial estoppel or by 
public policy.  "The equitable doctrine of judicial estoppel, as 
No. 
2002AP2448  
 
15 
 
traditionally applied in this state, is intended 'to protect 
against a litigant playing 'fast and loose with the courts' by 
asserting inconsistent positions.'"  State v. Petty, 201 Wis. 2d 
337, 347, 548 N.W.2d 817 (1996) (citations omitted).  Judicial 
estoppel precludes a party from asserting one position in a 
legal proceeding and then subsequently asserting an inconsistent 
position.  Id.  Judicial estoppel may be invoked where "(1) the 
later 
position 
is 
clearly 
inconsistent 
with 
the 
earlier 
position; (2) the facts at issue are the same in both cases; and 
(3) the party to be estopped convinced the first court to adopt 
its position."  Riccitelli v. Broekhuizen, 227 Wis. 2d 100, 111-
12, 595 N.W.2d 392 (1999). 
¶23 We decline to apply judicial estoppel here.  It is not 
clear Mrozek is trying to "play fast and loose" with the 
judicial system; as we noted earlier, a criminal defendant has 
many potential reasons to enter into a plea agreement, some of 
which 
would 
not 
be 
inconsistent 
with 
alleging 
Mallery 
negligently represented Mrozek.  For example, Mrozek may have 
pled to the charges in order to accept a lesser penalty than the 
maximum exposure she would have had if convicted after a trial.   
¶24 Mallery also argues Mrozek's claims should be barred 
on public policy grounds because her convictions bring her 
within the doctrine of in pari delicto, under which doctrine it 
has been said that "no court will lend its aid to a man who 
founds his cause of action upon an immoral or illegal act." 
Evans v. Cameron, 121 Wis. 2d 421, 427, 360 N.W.2d 25 (1985) 
(citations omitted).  In Evans, we upheld the dismissal of a 
No. 
2002AP2448  
 
16 
 
complaint for the negligent provision of legal services, where 
the complainant committed perjury at a bankruptcy hearing, 
allegedly upon receiving advice from her attorney to do so.  Id. 
at 424-25.  We stated, "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."  Id. at 428. 
¶25 We decline to bar Mrozek's malpractice claim under 
this doctrine.  In Evans, the act of perjury was so clearly 
wrongful that even without the advice of attorneys, Evans would 
have understood her actions were illegal.  Id. at 427-28.  We 
also 
note 
that 
Mallery's 
position 
before 
the 
Securities 
Commissioner was that Mrozek's actions were not illegal.  
Furthermore, as we explained in our discussion of guilty pleas 
and issue preclusion, supra, ¶21, her admission of guilt for 
plea agreement purposes is not conclusively determinative of the 
facts.   
¶26 Because we decide that issue preclusion does not apply 
to a guilty plea and that neither judicial estoppel nor public 
policy bars a claim for the negligent provision of legal 
services, we conclude that the circuit court erred in granting 
summary judgment to Mallery. 
C. 
PMI's Claims 
¶27 PMI contends that it suffered damages from its loss of 
ownership of the motel property and from its outlays for 
attorney's fees and costs in the bankruptcy and related matters.  
No. 
2002AP2448  
 
17 
 
Mallery argues that claim preclusion applies to PMI's negligence 
claim against the firm because the trustee in PMI's bankruptcy 
could have pursued PMI's claim, but it did not.  Mallery 
contends that the order closing the bankruptcy operates as a 
final judgment on PMI's claim.   
¶28 Claim preclusion prevents relitigation of the same 
claim when:  (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 should have been brought; and 
(3) a final judgment on the merits in a court of competent 
jurisdiction resolved the first lawsuit.  Kruckenberg v. Harvey, 
2005 WI 43, ¶21, ___ Wis. 2d ___, 694 N.W.2d 879; Northern 
States Power, 189 Wis. 2d at 551.  Claim preclusion is 
"'designed to draw a line between the meritorious claim on the 
one hand and the vexatious, repetitious and needless claim on 
the other hand.'"  Northern States Power, 189 Wis. 2d at 550 
(quoting Purter v. Heckler, 771 F.2d 682, 689-90 (3d Cir. 
1985)).  Key objectives of the doctrine of claim preclusion are 
to promote judicial economy and to "conserve the resources the 
parties would expend in repeated and needless litigation of 
issues that were, or that might have been resolved in a single 
prior action."  Hanlon v. Town of Milton, 2000 WI 61, ¶20, 235 
Wis. 2d 597, 612 N.W.2d 44 (citation omitted).  At some point, 
litigation over a controversy must come to an end.  DePratt v. 
West Bend Mut. Ins. Co., 113 Wis. 2d 306, 311, 334 N.W.2d 883 
(1983). 
No. 
2002AP2448  
 
18 
 
¶29 Mallery's major argument for the application of claim 
preclusion centers on the third prong of the claim preclusion.  
It contends that because PMI's negligence claim was a "core 
proceeding" in the bankruptcy, the bankruptcy court's judgment 
closing the bankruptcy estate was a final judgment on the merits 
in a court of competent jurisdiction.  Mallery also contends 
that even if PMI's claim was not a core proceeding, claim 
preclusion applies.  PMI contends that its negligence claim 
against Mallery was not a core proceeding and even if it were, 
the claim was abandoned by the trustee in bankruptcy, which 
caused it to revert to PMI. 
¶30 Bankruptcy courts have full judicial authority over 
the bankruptcy petition itself and may "hear and determine . . . 
all core proceedings . . . and may enter appropriate orders and 
judgments" 
with 
regard 
to 
core 
proceedings. 
28 
U.S.C. 
§ 157(b)(1) (2002);8 see also Dunmore v. United States, 358 F.3d 
1107, 1114 (9th Cir. 2004).  They also have the limited power to 
"hear a proceeding that [is related to the bankruptcy but] is 
not a core proceeding [and] submit proposed findings of fact and 
conclusions of law to the district court" for de novo review.  
28 U.S.C. § 157(c)(1); see also Dunmore, 358 F.3d at 1114.  
However, unless the parties consent to an expansion of the 
bankruptcy court's authority, it is the district court that 
enters the final order and judgment in non-core proceedings.  
                                                 
8 All further references to the United States Code are to 
the 2002 version unless otherwise noted. 
No. 
2002AP2448  
 
19 
 
Id.  The United States Code provides a non-exclusive list of 
what constitutes a core proceeding.9  
¶31 In this case, we need not decide whether PMI's claim 
is core because we conclude that PMI is correct in its 
contention that the bankruptcy trustee abandoned PMI's claim 
against Mallery for the negligent provision of legal services.  
11 U.S.C. § 554 provides the statutory basis for abandonment of 
property by a bankruptcy trustee.  It states in relevant part: 
(a) After notice and a hearing, the trustee may 
abandon any property of the estate that is burdensome 
to the estate or that is of inconsequential value and 
benefit to the estate. 
. . .  
(c) 
Unless the 
court orders otherwise, any 
property scheduled under section 521(l) of this title 
                                                 
9 28 U.S.C. 157(b)(2) provides in relevant part: 
(2) Core proceedings include, but are not limited 
to-- 
(A) matters concerning the administration of the 
estate; 
(B) allowance or disallowance of claims against 
the estate or exemptions from property of the estate, 
and estimation of claims or interests for the purposes 
of confirming a plan under chapter 11, 12, or 13 of 
title 11 [11 USCS §§ 1101 et seq., 1201 et seq. or 
1301 et seq.] but not the liquidation or estimation of 
contingent or unliquidated personal injury tort or 
wrongful death claims against the estate for purposes 
of distribution in a case under title 11 [11 USCS §§ 
101 et seq.]; 
(C) counterclaims by the estate against persons 
filing claims against the estate. 
No. 
2002AP2448  
 
20 
 
not otherwise administered at the time of the closing 
of a case is abandoned to the debtor . . . . 
As the United States Court of Appeals for the Seventh Circuit 
has recently explained: 
The Bankruptcy Code provides that "after notice and a 
hearing," the trustee, either on his own volition or 
under order by the bankruptcy court, "may abandon any 
property of the estate that is burdensome to the 
estate or that is of inconsequential value and benefit 
to the estate."  11 U.S.C. § 554(a).  In addition, 
property that the bankruptcy court orders the trustee 
to abandon is deemed abandoned, § 554(b), and likewise 
property that has been scheduled, § 521(l), but "not 
otherwise administered at the time of the closing of a 
case."  § 554(c).   
Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 618 (7th 
Cir. 2002).  Morlan explains the requirements for abandonment of 
a claim as:  (1) notice and hearing; (2) property of the estate 
that is burdensome to the estate or is of inconsequential value 
or benefit to the estate; (3) property that has been scheduled; 
but (4) not otherwise administered at the time of closing of the 
bankruptcy estate.  Id. at 618.  PMI's claim against Mrozek 
meets these parameters. 
¶32 On March 27, 1996, PMI's bankruptcy trustee, Randi L. 
Osberg, gave notice in a report filed with the court that there 
were 
"no 
assets 
in 
the 
estate" 
that 
were 
not 
"either 
inconsequential in value or burdensome to the estate."  Trustee 
Osberg stated further, "This report shall be considered as an 
abandonment of all scheduled property of the bankruptcy estate."  
PMI's claim against Mallery was "scheduled" in the estate, as 
PMI had listed it as a claim in its filings with an "unknown" 
value, but the trustee had not administered it.  11 U.S.C. 
No. 
2002AP2448  
 
21 
 
§ 554(l).  On November 26, 1996, a final decree was entered that 
concluded PMI's bankruptcy action.   
¶33 When a bankruptcy trustee abandons a scheduled claim, 
it reverts to the debtor, as PMI's claim did under 11 U.S.C. 
§ 554(c).  As the United States Court of Appeals for the Tenth 
Circuit recently explained: "Property abandoned under [§ 554] 
ceases to be part of the estate.  . . .  It reverts to the 
debtor and stands as if no bankruptcy petition was filed."  
Dewsnup v. Timm, 908 F.2d 588, 590 (10th Cir. 1990) (citing 
Brown v. O'Keefe, 300 U.S. 598, 602 (1937)).  "Following 
abandonment, 'whoever had the possessory right to the property 
at the filing of bankruptcy again reacquires that right.'"  
Dewsnup, 908 F.2d at 590 (citation omitted).  This is also the 
view of the Seventh Circuit, which has explained, "the effect of 
a trustee's abandoning a claim is to revest the ownership of it 
in the debtor."  Morlan, 298 F.3d at 617 (citing Koch Refining 
v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1346 n.9 (7th 
Cir. 1987)); Catalano v. Commissioner, 279 F.3d 682, 685 (9th 
Cir. 2002); Miller v. Generale Bank Nederland, N.V., 217 F.3d 
74, 76 (2d Cir. 2000).   
¶34 The court of appeals did not accord merit to PMI's 
abandonment argument.  It reasoned that the cases cited by PMI, 
Roberts v. Pearce Construction Co., 624 So. 2d 1009 (Ala. 1993) 
and Barletta v. Tedeschi, 121 B.R. 669 (N.D.N.Y. 1990), were 
standing cases, and therefore unsupportive of PMI's abandonment 
argument.  The court of appeals relied heavily on Bank of 
No. 
2002AP2448  
 
22 
 
Lafayette v. Baudoin, 981 F.2d 736 (5th Cir. 1993).  We conclude 
its reliance is misplaced.   
¶35 Abandonment 
did 
not 
occur 
in 
Baudoin. 
 
First, 
according to the opinion, the claim at issue was never 
"scheduled" in the bankruptcy.  Baudoin, 981 F.2d at 739 n.4.  
The court reasoned: 
[W]e do not consider the Baudoins' earlier mentioned, 
vague 
reference 
to 
'Any 
possible 
claim 
against 
creditor for actions taken against debtors prior to 
bankruptcy proceeding' in their schedule of assets a 
sufficient scheduling of their claim against the Bank 
. . . . 
Id.  If a claim has not been scheduled under 11 U.S.C. 521(l) in 
the bankruptcy, it cannot meet the criteria that 11 U.S.C. 
554(c) requires as a precondition for abandonment.  Morlan, 298 
F.3d at 618.  Second, the trustee did not give notice of intent 
to abandon the claim.  Baudoin, 981 F.2d at 739 n.4.  The court 
reasoned, "[a] professed intent [by the trustee] to abandon 
cannot constitute abandonment, as 11 U.S.C. § 554(a) requires 
notice and a hearing prior to abandonment."  Id.   
¶36 The court of appeals in the case before us also relied 
on Sure-Snap Corp. v. State Street Bank & Trust Co., 948 F.2d 
869 (2d Cir. 1991), for its conclusion that claim preclusion 
bars PMI's negligence claim against Mallery.  Sure-Snap was a 
Chapter 11 proceeding wherein the debtor filed objections to the 
banks' proofs of claim.  Id. at 871.  The validity of the banks' 
liens was litigated and upheld in the bankruptcy proceeding and 
on appeal to the district court.  Id.  When the final bankruptcy 
hearing was held in Sure-Snap's bankruptcy, "no pending claims 
No. 
2002AP2448  
 
23 
 
[were] alleged against the banks."   Id.  Almost one year after 
the debtor's plan of reorganization was confirmed by the 
bankruptcy court, Sure-Snap brought lender liability claims 
against the banks.  Id. at 872.  The court concluded that the 
lender liability claims were the same cause of action that had 
already been litigated in bankruptcy court when Sure-Snap 
objected to the validity of the banks' liens, and it applied 
claim preclusion dismissing the action.  Id.  Aside from the 
significant differences in a Chapter 11 proceeding, where the 
debtor is in possession of the assets during the bankruptcy and 
subsequent reorganization, and a Chapter 7 proceeding, where an 
independent trustee is named to serve the bankruptcy estate, 
Sure-Snap is a garden variety claim preclusion case.  Sure-Snap 
litigated its claims against the banks once, and it had no right 
to do so again in a different forum.  DePratt, 113 Wis. 2d at 
311.  PMI has never litigated its claim against Mallery. 
¶37 We conclude that Morlan and Dewsnup provide the better 
reasoned view of the effect that a trustee's abandonment of 
property has on a Chapter 7 debtor's ability to proceed on a 
scheduled claim that has not been subject to administration.  An 
abandoned claim "reverts to the debtor and stands as if no 
bankruptcy petition was filed."  Dewsnup, 908 F.2d at 590; see 
also Mundell v. Mundell, 858 So. 2d 768, 771-72 (La. Ct. App. 
2003) (concluding that claims that were abandoned by the trustee 
in bankruptcy could not form the basis for claim preclusion).  
Accordingly, we conclude that the order closing the bankruptcy 
proceeding did not operate as a final judgment on PMI's claim.  
No. 
2002AP2448  
 
24 
 
Therefore, claim preclusion is not applicable to its claim 
against Mallery for the negligent provision of legal services, 
and the circuit court erred in granting summary judgment against 
PMI on this basis. 
D. 
Joint Claims 
¶38 Finally, 
PMI 
and 
Mrozek 
argue 
that 
Mallery's 
negligence resulted in lost profits for PMI and rendered 
Mrozek's contract to manage the AmericInn worthless because her 
compensation was based on the profitability of PMI.  The court 
of appeals summarized the plaintiffs' burden in proving damages 
for lost profits: 
Damages for lost profits need not be proven with 
absolute certainty, but the claimant must produce 
sufficient 
evidence 
. . . 
on 
which 
to 
base 
a 
reasonable inference as to a damage amount.  To 
establish lost profits, the claimant must produce 
evidence of the business's revenue as well as its 
expenses.  Assertions as to the amount of lost profits 
have no evidentiary value unless supported by figures 
showing profits and losses.   
Lindevig v. Dairy Equip. Co., 150 Wis. 2d 731, 740, 442 N.W.2d 
504 (Ct. App. 1989) (citations omitted).  In situations like 
this, where a new business has no previous profit history, the 
court of appeals has provided further guidance on how lost 
profits may be recovered, stating that the party seeking lost 
profits must "present credible comparable evidence or business 
history and business experience sufficient to allow a fact 
finder to reasonably ascertain future lost profits."  T & HW 
Enters. v. Kenosha Assocs., 206 Wis. 2d 591, 605 n.6, 557 N.W.2d 
480 (Ct. App. 1996). 
No. 
2002AP2448  
 
25 
 
¶39 PMI and Mrozek argue that at trial they would have 
produced numerous sources of information showing a basis for 
ascertaining lost profits, including the AmericInn franchise 
license agreement offering assistance in operating the motel and 
representing that the franchise would be profitable; the 
"forecasted statement of operations and pre-tax cash flow" 
prepared by CPAs and included in the stock offering documents 
prepared by Mallery; a 1992 appraisal of the PMI property; 
deposition testimony establishing that the area surrounding the 
motel has been developed, having a positive effect on the 
motel's profitability; and five years of tax returns from the 
entity that ultimately purchased the property and operated the 
motel. 
¶40 Notwithstanding the above recitation, the information 
presented is not sufficient for a fact finder to reasonably 
ascertain lost profits.  The franchise license agreement does 
not provide any specific profit projections for the motel and in 
fact disclaims such projections:  
The LICENSOR expressly disclaims the making of . . . 
any estimates, projections, warranties or guaranties, 
express or implied, regarding the potential Gross 
Revenues, profits, earnings or financial success of 
the LICENSEE'S AmericInn® Motel, except as may be set 
forth in the LICENSOR'S Uniform Franchise Offering 
Circular, a copy of which has been received by the 
LICENSEE.10 
                                                 
10 The document referred to as the "Uniform Franchise 
Offering Circular" is not included in the record. 
No. 
2002AP2448  
 
26 
 
The forecast statement prepared by CPAs likewise included a 
disclaimer, stating: 
[The forecast statement] is limited to presenting 
in the form of a forecast information that is the 
representation of management and does not include 
evaluation 
of 
the 
support 
for 
the 
assumptions 
underlying the forecast. We have not examined the 
forecast and, accordingly, do not express an opinion 
or any other form of assurance on the accompanying 
statements or assumptions. Furthermore, there will 
usually be differences between the forecasted and 
actual 
results, 
because 
events 
and 
circumstances 
frequently do not occur as expected, and those 
differences may be material.  
The 1992 appraisal contains a valuation based on the income 
capitalization approach, but states that "[t]he income, expenses 
and conversion rates estimated in this analysis are unknown 
variables which will occur in the future.  . . .  [B]ecause the 
real estate market is constantly changing, no warranty or 
representation is made that these projections will occur as 
estimated in this report."  Therefore, any income or expense 
projections in these documents are purely speculative. 
¶41 Although Mrozek claims she would produce deposition 
testimony establishing that the area surrounding the motel had 
been developed, there is no evidence of this in the record, and 
a court considering a motion for summary judgment cannot rely on 
mere allegations in the pleadings, but must examine the facts of 
record.  See Moulas v. PBC Prods., Inc., 213 Wis. 2d 406, 410-
11, 570 N.W.2d 739 (Ct. App. 1997), aff'd, 217 Wis. 2d 449, 576 
N.W.2d 929 (1998).  Furthermore, even if this information about 
the surrounding area had been supplied, it would not allow us to 
No. 
2002AP2448  
 
27 
 
reasonably 
ascertain 
the 
profitability 
of 
a 
particular 
establishment within that area. 
¶42 The last documents Mrozek points us to, the tax 
returns of the entity that eventually operated the motel, 
contain the type of information that may be useful in making a 
determination of lost profits.  The returns show that the new 
owner began to show positive ordinary income in 1997, year three 
of operation, and averaged roughly $31,000 in ordinary income 
through the six-year period.  Looking at this data, the circuit 
court stated: 
I 
think 
that 
. . . 
the 
income 
history 
of 
the 
corporation 
that's 
actually 
functioning 
there 
is 
relevant information and would be admissible as to 
profit projections for the proposed PMI, Plover Motel, 
Incorporated. 
What I don't believe is here, however, is the 
opposite side of the ledger and that is evidence that 
would detail the proposed expenses of this operation. 
Certainly 
the 
purchase 
price 
for 
the 
operating 
business that's at that location now and the purchase 
price 
for 
the 
Plover 
Motel, 
Incorporated 
were 
different 
and 
the 
capitalization 
of 
those 
two 
operations, how much debt they incurred, what the 
interest rates were on the debt that was incurred are, 
I would assume, different . . . . 
And 
the 
projection 
of 
profit 
can't 
be 
accomplished without a correlation between the expense 
portion of the ledger and the projections on income 
. . . . 
So lacking that, I don't believe there is 
evidence in the record that's sufficient to support 
the judgment in terms of projected profit of the 
corporation and, therefore, management expenses to be 
paid to [Mrozek] . . . . 
No. 
2002AP2448  
 
28 
 
We agree with the circuit court's analysis.  Given that we must 
look to figures showing profits and losses in order to ascertain 
damages, PMI's failure to provide evidence of expenses relating 
to a business owner in its position results in PMI's failing to 
meet its burden.  See Lindevig, 150 Wis. 2d at 740.  The 
evidence we are left with on the summary judgment record makes a 
determination of PMI's lost profits speculative.  It also 
follows that if PMI has demonstrated no profits, Mrozek's 
contract 
that 
required 
profitability 
before 
she 
received 
payments under it has no value.  Accordingly, we conclude the 
circuit court correctly granted summary judgment on PMI's and 
Mrozek's claims relating to lost profits. 
III. CONCLUSION 
¶43 We conclude that the circuit court correctly granted 
summary judgment dismissing the claim of PMI for lost profits, 
as well as Mrozek's claim for lost management fees that was 
dependent on PMI's claim for lost profits.  However, we conclude 
that it was error to dismiss Mrozek's and PMI's other claims.  
Accordingly, we affirm in part, reverse in part and remand to 
the circuit court for further proceedings on Mrozek's and PMI's 
remaining claims based on the allegedly negligent provision of 
legal services. 
By the Court.—The decision of the court of appeals is 
affirmed in part; reversed in part and cause remanded. 
 
No.  2002AP2448.pdr 
 
1 
 
¶44 PATIENCE DRAKE ROGGENSACK, J. (concurring).   There is 
one remaining issue presented by this case that the majority 
chose not to address because it was not briefed by the parties.  
That is whether an appellate court can apply issue preclusion 
when the circuit court has not considered the question.  I write 
in concurrence to bring this issue to the attention of the 
courts and the litigants because I have concluded that the court 
of appeals erred in doing so here.   
¶45 In the usual course of an appeal involving issue 
preclusion, the task of an appellate court is solely to review 
the decision of a circuit court that either chose to apply issue 
preclusion or did not so choose.  However, that is not what 
happened in this case.  Here, the appellate court applied issue 
preclusion when the question had never been presented to or 
decided by the circuit court, nor had any party argued to the 
court of appeals that it should be applied.   
¶46 In my view, issue preclusion cannot be applied in the 
first instance by an appellate court because it cannot be 
applied as a matter of law, but only as a discretionary 
determination made after a fairness analysis.  Paige K.B. v. 
Steven G.B., 226 Wis. 2d 210, 225, 594 N.W.2d 370 (1999).  For 
example, in exercising its discretion as to whether to apply 
issue preclusion, the circuit court considers:  (1) whether 
there are apt to be significant differences in the quality or 
extensiveness of the two proceedings such that re-litigation of 
the issue is warranted and (2) whether matters of public policy 
or individual circumstances would render the application of 
No.  2002AP2448.pdr 
 
2 
 
issue prelusion fundamentally unfair, including whether the 
party against whom preclusion is sought had an inadequate 
opportunity or incentive to obtain a full and fair adjudication 
of the issue in the initial litigation.  Michelle T. v. Crozier, 
173 Wis. 2d 681, 689, 495 N.W.2d 327 (1993).   
¶47 There is no one, right answer to these inquiries, but 
rather, the decision about whether to apply issue preclusion 
involves the exercise of discretion based on facts developed in 
the circuit court.  Ambrose v. Continental Ins. Co., 208 Wis. 2d 
346, 355-56, 560 N.W.2d 309 (Ct. App. 1997).  Discretionary 
decision making of this type is not the task of an appellate 
court where no circuit court record relative to the issue has 
been developed.  An appellate court is to review a circuit 
court's exercise of discretion, not exercise discretion without 
the benefit of either a circuit court decision or circuit court 
record developed in response to a party's assertion that issue 
preclusion should be applied.  Therefore, although it is 
possible 
for 
an 
appellate 
court 
to 
conclude 
that 
issue 
preclusion is not available as a matter of law, as we have here, 
because the same issue was not actually litigated in the prior 
proceeding, see id. at 356, it is not appropriate for the court 
of appeals to apply issue preclusion as the initial decision 
maker.  That is beyond the scope of an appellate court's 
authority.   
¶48 Accordingly, I conclude that the court of appeals 
erred in applying issue preclusion to Mrozek's claims and 
No.  2002AP2448.pdr 
 
3 
 
because this question requires examination, I respectfully 
concur in the majority opinion. 
 
No.  2002AP2448.pdr 
 
1