NO. 88-58

INTHE SUPREME COURT OF THE STATE OF MONTANA

1988

WALTER H. PESCHEL,
Plaintiff and Appellant,-17sWILLIAM EVAN JONES,

Defendant and Respondent.

APPEAL FROM: DistrictCourt of theFourth JudicialDistrict, In and fortheCounty of Missoula, The Honorable Leif Erickson, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Martin J. Elison, Missoula, Montana LarryM. Elison, Missoula, Montana WilliamJ. Powell, Spokane, Washington

For Respondent:
WilliamL. Crowley; Boone, Karlberq & Haddon, Missoula, Montana

Submitted on Briefs: May 26, 1988

Decided: July 14, 1988 

## qljt ¶

## 41988' Filed: '

Clerkthe loan was going to be assigned to HUD. On November 10, 1979, Peschel and the contractor Martin Development entered into a written agreement, entitled Addenda No. 1. The agreement was signed by these two parties only and was an attempt to cure the financing problems so as to allow constructionto continue. TheAddenda agreement released and discharged both parties from all disputes existing between them on that date. Work resumed on the project into December, 1979. However, when Martin Development prepared construction loan requisition No. 13 (Draw No. 13), Washington Mortgage refused to pay the disbursementbecause 

### it intended to reassign the construction loan to HUD. As a result, no further construction loan draws would be authorized and disbursed until HUD accepted the assignment and approved the draws. Many subcontractor bills were not paid on time and construction ceased. Peschel filed a "complaint fordamages forprofessional negligence" against Jones on November 14, 1985. The complaint alleged that the agreement negotiated by Jones, Addenda No. 1, was inadequate and proximately caused damages totalling $1,095,740 for increased constructioncosts,monies which could not be refunded from escrow, legal fees, accounting fees, rent impoundment charges, and an interest rate increase incurredwhen forced to refinance the project. Peschel alleged Addenda No. 

### 1 was defective because, inter alia, it failed to obtain consent from HUD, the contractor's bonding company, and Washington Mortgage. Additionally, the complaint alleged various other defects including: Jones failed to negotiate a resolution as to the current defaults with Washington Mortgage, failed to advise Peschel that constructionwould ceaseunless additional parties consented, released the contractor Martin Development from all claims, and incorrectly advised Peschel of liability limitations.Mr. JusticeJohn Conway Harrison delivered the Opinion of the Court.

~laintiff/appellant, Walter H. Peschel, appeals a summary judgment granted in favor of defendant/respondent, William Evan Jones. Summary judgment was granted on two separate dates, December 11, 1986 and December 8, 1987, in the Fourth Judicial District, Missoula County. We affirm. In October of 1978, Walter Peschel (Peschel) was involved in the development and construction of an apartment complex which was to be known as the "Mountain Wood Apartments." Peschel was the sole general partner of a limited partnership. In June, 1978, Peschel entered an oral agreement, known as the MacDonald Agreement, with Charles Isaly (Isaly) for the construction of the complex. Isaly represented the construction contractor, Martin Development Company (Martin Development)

# . The principal lender was the Washington Mortgage Company (Washington Mortgage), the loanwas guaranteedby the Department of Housing and Urban Development (HUD)

## , and the parties entered a HUD form construction contract June 

### 6, 1978. The loan amount obtained fromWashington Mortgage did not include the total amount needed for construction. Peschel desired to construct a complex of a quality which would cost more than the guarantee obtained from HUD. Peschel intended topersonally finance the amounts above that provided in theprincipal loan. Construction of the complex began in July, 1978 and financing problems developed shortly thereafter. Peschel laterhired defendant, WilliamEvan Jones (Jones)an attorney at law, to assist in negotiations regarding the financing difficulties. On October 2, 1979, Washington Mortgage notified Peschel that he had defaulted on his loan and thatTheDistrict Court granted apartial summary judment in favor of defendantJonesDecember 11, 1986,based on a theory of collateral estoppel. The District Court granted summary judgment for Jones as to the remainder of the complaint December 8, 1987, holding that the statute of limitations prohibited the remaining issues from going forward. Peschelraises two issues on appeal: 1. Did the District Court correctly determine that defendant was entitled to partial summary judgment based on collateral estoppel? 2. Did the statute of limitations prohibit plaintiff fromhis causeof action?

1. CollateralEstoppel. The facts surrounding this case are somewhat involved and have spawned a significant amount of litigation. In Martin Development Co. v. Keeney Construction Co. (Mont

# . 1985), 703 P.2d 143, 42 St.Rep. 752,we affirmed a ~istrict Court award of $40,000 toMartin Development for lostprofits and against Peschel

# . We also held that the Addenda represented the entire agreement of the parties and reversed

an award of attorney's fees and an award of interestbased on lost profits. Martin DevelopmentCo., 703 P.2d at 148, 42 St.Rep. at 758. In the present case,plaintiff Peschel is bound by the facts and law as establishedby this prior case. Defendant Jones entered a motion for summary judgement

on November 10, 1986. Jones alleged that portions of the acts or omissions alleged by Peschel to constitute legal malpractice had been effectively determined by prior litigationand thatJones was entitled to summary judgmentas to those acts or omissions according to the theory of collateral estoppel. The District Court granted partial summary judgment December 11, 1986, and denied a motion byplaintiff Peschel to alter or amend the partial summary judgment February 9, 1987. The District Court also issued two orders clarifying the extent of the partial summary judgmentonJune 5, 1987 andAugust 12, 1987. Simply stated,Peschel's claim is that Jonesproduced a defective documentand offered Pescheldefective legaladvice when hepresentedAddendaNo. 1 to Peschel and advised him to sign it. More specifically, Peschel listed the following twelve acts or omissions in his complaint labeled a. through 1. ofparagraph

### V:

a. Defendant failed to procure the consent of HUD to "Addenda No. 1," agreement between Plaintiff and the contractor. b. Defendant failed to obtain the consent of the contractor's bonding company to "AddendaNo. 

### 1.

### "

c. Defendant failed to obtain the consent of Washington Mortgage Company to "Addenda No. 1" or to attempt to negotiate resolutionof current defaults with that firm.
d. Defendant advised Plaintiff that the consentof the foregoing partieswas not necessary for "Addenda No. 1" to be effective and for the project to continue.

e. Defendant drafted and advised Plaintiff to agree to paragraph 11 of "Addenda No. I," which released and discharged the contractor from all claims.


### f. Defendant failed to obtain commitment from HUD to release drawNo. 13 in conjunction with carrying out "AddendaNo. 1."g. Defendant advised Plaintiff that commitment of HUD to releaseDrawNo. 13 was not necessary. h. Defendant failed to obtain written agreement from the contractor's bonding company to guarantee completion of the project. i. Defendant advised Plaintiff that such commitment from the bonding company was not necessary and that the bonding company would stillbe liable. j. Defendant failed to include in "AddendaNo. 

### 1"and failed to attempt to negotiate provisions in said agreement requiring the contractor toproduce lien waivers each month so that progress disbursements would not be held up. 

### k. Defendantadvised Plaintiffthat his liabilityunder paragraph 13 of "Addenda No. 

### 1"was limited to the $50,000.00 and $15,000.00 mentioned in paragraphs 2(a) and 2(d)

# . 1. Defendant advised Plaintiff not to accept a proposal subsequently made by the bonding company to construct a third building and thereafter litigate certain issues thenpending. By way of its order granting partial summary judgment, the order denyingPeschel's motion to alter or amend,and the two orders of clarification, the District Court granted summary judgment based on the doctrine of collateral estoppel as to issues (a), (b), (dl, (£1, (91, (h), (i) (j) and the portion of (c)referring to the failure to obtain the consent of Washington Mortgage to Addenda No. 

### 1 (the remainder of subsection (c)washeld to still be at issue). In the initialorder,theDistrict Court stated Peschel

was bound by the facts and law as established in Martin Development Co. v. Keeney construction Co. (Mont. 1985), 703P.2d 143, 42 St.Rep. 752, and the District Court litigation preceeding that appeal. The District Court framed Peschel's issueby stating: [Pllaintiffisnot contestingwhether or not [he] is bound under the doctrine of collateral estoppel by those facts and matters found to be established in the District Court action and the Supreme Court action. Rather, Plaintiff's positionwas that such established facts and matters, while binding on Plaintiff in this action, were not dispositive of the specific issues raised between Plaintiff and Defendant as framed and definedby the pleadings and contentions of theparties. This is the crux of Peschel's argument on appeal. While Peschel does not challenge the fact that he is bound by the factsand lawas established in theprior litigation,he does contend that the prior litigation did not determine those issues he now raises and were determined to be without merit by the DistrictCourtaccording to collateralestoppel. A party isentitled to summary judgment if the totality of the record shows "thatthere is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

### " Rule 56(c)

## ,M.R.C~V.P. The purpose of summary judgment is to promote judicial economyby eliminating unnecessary trials. Still, the motion should be granted only when there is no genuine issue as to any material fact and themoving party is entitled to a judgment

as amatter of law. The initial burden of demonstrating the absence of any genuine issue regarding anymaterial fact lies with the moving party. See,e.g. Rumph

### v. DaleEdwards, Inc.

(1979), 183 Mont. 359, 600 P.2d 163. If themoving party is successful, the burden of proof shifts to the non-moving party to demonstrate the presence of a genuine issue as tosome material fact. See,Rumph, supra; and DeWinterv. Capp Homes, Inc. (1973), 162 Mont. 19, 507 P.2d 1061. "A1 1 reasonable inferences that may be drawn from the offered proof are to be drawn in favor of the party opposing the summary judgment.

### " Cereck v. Albertson's, Inc. (1981)

## , 195 Mont. 409,411, 637P.2d 509,511. "Collateral estoppel or issuepreclusion refers to the situation where an issue has been previously litigated by a party in a former case and that party is estopped from re-litigating it in a subsequent case." In Re Marriage of Stout (Mont. 1985), 701 P.2d 729, 733, 42 St.Rep. 856, 860, 861. Collateral estoppel is distinct from res judicata,or claim preclusion, which prohibits the litigation of a claim previously litigated and decided. Collateralestoppel refers to a preclusion of issues, as opposed to a claim. We have established a three-part inquiry to determine whether collateralestoppel applies to a given case: 1. Was the issue decided in the prior adjudication identical with the one presented in the action in question?
2. Was there a final judgment on t.he merits?
3. Was the party against whom the plea is asserted aparty or inprivity with a party to theprior adjudication?

Aetna Life Ins. Co. v. McElvain (Mont. 1986), 717 P.2d 1081, 1086, 43 St.Rep. 697, 703 (quoting, In Re Marriage of Stout (Mont. 1985), 701 P.2d 729, 733-734, 42 St.Rep. 856-861,and Aetna Life and Cas. Ins. Co. v. Johnson (Mont. 1984), 673 P.2d 1277, 1279,41 St.Rep. 40,42). This Court has held that upon an affirmative answer to all three questions, collateral estoppel bars litigation regarding an issue in a civil trial which was previouslylitigated in a criminal trial. Aetna Life and Cas. Ins. Co.

v. Johnson, 673 P.2d at 1279-80, 41 St.Rep. at 42-43. "We have since broadened this holding by applying this test to all cases in which collateral estoppel is at issue." In Re Marriage of Holland (Mont. 1986), 730 P.2d 410, 412, 43 St.Rep. 2293, 2295. Peschel does not challenge the second and third elements of collateral estoppel as related above. Instead, he focuses on the first element and states that the prior adjudication did not decide the identical issues raised in this case. Peschel is correct in that none ofhis identical individual issues were determined in prior litigation. The issue must be identical, and we are unable to locate where issues identical to those raised 

### by Peschel were previously litigated. For example, the first issue raised in Peschel's complaintwould be whether defendantJones was negligent when he failed to procure the consent of HUD to Addenda No. 1. This identical issue has notbeen decided by prior litigation and is not prohibited under the theory of collateral estoppel. Still, we affirm the District Court based on a different reasoning. TheDistrictCourtgranted the firstmotion forpartial summary judgmentby analyzing facts established in the prior litigation, applying them to this cause of action, and concluding that as to certain issues raised in Peschel's complaint there was no genuine issue as to anymaterial fact and that defendant Jones was entitled to a judgment as a matter of law on those issues. In otherwords,certain facts established in prior litigation now make some of Peschel's current claims tobe withoutmerit. Counsel for Peschelhas admitted that he is bound by those facts established in the prior litigation. The District Court certainly has the authority to take judicial notice of facts established inrelated prior litigation. In doing so, the District Court correctly determined that there was no genuine issue as to any material fact regarding certain issues raised in Peschel's complaint. The allegations Peschel states in sub-paragraphs (a), (c)

## , (d), (f)

## , and (g)

## , all relate to the consent and commitment of HUD and Washington Mortgage. We previously noted that shortly after construction began in 1978, "problemsarose concerning Peschel's obligations to fund the cost shortages during the course of construction." Martin DevelopmentCo., 703 P.2d at 145, 42 St.Rep. at 753. Addenda No. 1 was the result of negotiations to settle thesematters and was not related to HUD. The parties agree that it was Peschel's obligation toproperly fund those amounts exceeding that guaranteed by HUD. Additionally, the consent and commitment of Washington Mortgage was not necessary because they notified Peschel he defaulted on his loan October 2, 1979 and that itwould be assigned toHUD. AddendaNo. 1was not signed until November 10, 1979 and the consent and commitmentofWashingtonMortgage after notice of default and assignment would have been meaningless. Since the prior litigation establishes a situation where there is now no genuine issue as to any material fact, the District Court correctly granted summary judgmenton these issues. Peschel alleges in sub-paragraphs (b), (h), and (i) that Joneswas negligent in his advice to Peschel and in not obtaining the consent and a guarantee of completion from Martin Development'sbonding company. However, it has been established that the bonding company would not have been liable in any event because there was no default by Martin Development. Martin DevelopmentCo., 703 P.2d at 146-147, 42 St.Rep. at 755-756. Finally, Peschel alleges in sub-paragraph (j) that defendant was negligent in notnegotiating provisions "requiring the contractor to produce lien waivers each month so thatprogress disbursementswould not be held up." However, the financing difficulties were entirely unrelated to this issue and the reason drawNo. 

### 13

was not paid was because Washington Mortgage previously assigned the loan to HUD. Martin DevelopmentCo., 703 P.2d at 145, 42 St.Rep. at 754. We affirm the District Court decision granting partial summary judgment as to issues listed in Peschel's complaint in paragraph V, sub-paragraphs (a)

## , (b) (dl, (f), (g), (h), (i),and (j)

## , and the portion of sub-paragraph (c)referring to the failure to obtain the consent of Washington Mortgage to Addenda No. 

### 1.

2. Statute of Limitations. On December 

### 8, 1987, the District Court granted an additionalpartial summary judgment favoring defendant Jones

as to all of plaintiff Peschel's remaining issues. This included two additional issues added to Peschel's complaint by amendment. The District Court held that Peschel's remaining claims were barred by the statute of limitations for a legalmalpractice action. Section 27-2-206,MCA, states: An action against an attorney licensed to practice law in Montana or a paralegal assistant or a legal intern employed by an attorney based upon the person's alleged professional negligent act or for error or omission in the person's practice must 

### be commenced within 3 years after t plaintiff discovers - or through the use of reasonable diligence shou1 d- ha= discovered 

### -- the act, error, or omission, whichever occurs last, butTn no case may the action be commenced after 10 years from the date of the act, error, or omission. (Emphasisadded.)Peschel filed his complaint November 14, 1985, and the District Court noted that "the crucial question is whether

[Peschel] discovered or through the use of reasonable diligence should have discovered the alleged act, error, or omission prior to November 14, 1982." The District Court concluded that "under the established facts, [Peschel] discovered or though the use of reasonable diligence should have discovered the alleged acts, errors or omissions prior toNovember 14, 1982." Peschel's claims remaining after the first partial summary judgment were as follows (claims (m) and In) were added by amendment): (c) Defendant's failure to negotiate resolution of current default with Washington MortgageCompany.

(e) Defendant's release and discharge of the contractor, Martin, from all claims in Paragraph 11 of the Addenda, the exonerationclause.



### (k) Defendant'sadvice that Plaintiff's liability under the Addenda was limited to a total of $65,000.00. (1) Defendant's advice against accepting a proposal by the bonding company to build a third building and thereafter litigate pending issues. (m) Defendant's advice that Plaintiff sign a letter of exoneration of the contractor's prior defaults and send it toHUD. (n) Defendant's failure to attach financialexhibitsand theHUD agreement to the Addenda.
Peschel claims he did not discover the facts essential to a
cause of actionuntil afterJanuary 25, 1984,when a district court decision found judgment for Martin Development andagainst Peschel in the amount of $72,000. See, Martin DevelopmentCo., 703 P.2d at 145, 42 St.Rep. at 754. ~lthough Peschel knew of many of the above facts,he argues he did not know those facts might constitute a cause of action until he was found liable to Martin Development. In short, he asserts he had knowledge of the acts, but did not have knowledge of the alleged negligence. The general issue to be determined is whether Peschel discovered or through the use of reasonable diligence should have discovered, the allegedly negligent acts, errors, 

### or omissions by defendant Jones before November 14, 1982. We have previously addressed similar issues and in Burgett v. Flaherty (1983), 204 Mont. 169, 173-174, 663 p.2d 332, 334,

we stated:As a matter of law, what is critical in determining when a legal malpractice action accrues isknowledge of the facts essential to the cause of action, not knowledge of the legal theories upon which an actionmay be brought.

"[I] t is the knowledge of facts rather than discovery of legal theory, that is the test. The test is whether the plaintiff has information of circumstances sufficient to put a reasonableperson on inquiry, orhas the opportunity to obtain knowledge from sources open to his or her investigation. (Sanchezv. South Hoover Hospital 18 Cal.3d. 93, 101, 132 Cal.Rep. 657, 553 P.2d 1129.) If the plaintiff believes that someonehas done something wrong because of the damages suffered by her, such a fact is sufficient to alert a plaintiff 'to the necessity for investigation and pursuit of her remedies.' (Sanchez v. South Hoover Hospital, supra, 1.8 Cal.3d atAdditionally,wehave specifically rejected the "damage rule," wherein the statute of limitations in a legal malpractice action would notbegin to rununtil the plaintiff discovers his actual or determinable damages. Schneider v. Leaphart (Mont. 1987), 743 P.2d 613, 616, 44 St.Rep. 1699, 1702. Such a rulewould conflict with 5 27-2-206,MCA,which speaks to the discovery of the act, error, or omission, and not to the discovery of actual or determinabledamages. Despite this holding, Peschel states the statute of limitations should have been tolled onhismalpractice claim until the District Court found him liable to Martin Development. Peschelcontendsthis is the timehe discovered he had a cause of action. Upon carefully reviewing each of Peschel's remaining claims, it is clear that Peschelknewthe facts giving rise to each claim and through the use of reasonable diligencehe could have discovered any act,error,

or omission believed to constitute negligence long before November 14, 1982. All of Peschel's claims involve Jones's preparation, presentation, and advice regarding Addenda No. 1. This document was signed November 10, 1979, more than threeyearsbefore November 14, 1982. Peschelhad litigation pending againsthim,he was required to contribute moremoney to the project than he believed to be his responsibility, construction was delayed, Washington Mortgage had sent Peschel a notice of default and assigned the loan to HUD,and the fund release known as Draw No. 13 was not paid in December, 1979. Peschel was aware of all of these events when they occurred,and longbefore November 14,1982. After

a careful review of all of the facts, we find that through the use of reasonable diligence Peschel had sufficient informationto discover any alleged act,error or omissionbyJones. We affirm thedecision of theDistrict Court granting partial summary judgment on Peschel's remaining claims. For the foregoing reasons, the decision of theDistrict Court is affirmed. 

## n

We concur: