NO. 88-58 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1988 

WALTER H. PESCHEL, 

Plaintiff and Appellant, 

-17sWILLIAM EVAN JONES, 

Defendant and Respondent. 

APPEAL FROM: District Court of the Fourth Judicial District, 

In and for the County of Missoula, 

The Honorable Leif Erickson, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Martin J. Elison, Missoula, Montana 

Larry M. Elison, Missoula, Montana 

William J. Powell, Spokane, Washington 

For Respondent: 

William L. Crowley; Boone, Karlberq & Haddon, Missoula, 

Montana 

Submitted on Briefs: May 26, 1988 

Decided: July 14, 1988 

qljt ¶ 4 1988' Filed: ' 

Clerk 
the 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 

construction to continue. The Addenda 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 disbursement because 

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 for damages for professional 

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 construction costs, monies 

which could not be refunded from escrow, legal fees, 

accounting fees, rent impoundment charges, and an interest 

rate increase incurred when 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 

construction would cease unless additional parties consented, 

released the contractor Martin Development from all claims, 

and incorrectly advised Peschel of liability limitations. 
Mr. Justice John 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 loan was guaranteed by the 

Department of Housing and Urban Development (HUD) , and the 

parties entered a HUD form construction contract June 6, 

1978. The loan amount obtained from Washington 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 to personally finance the amounts above that 

provided in the principal loan. 

Construction of the complex began in July, 1978 and 

financing problems developed shortly thereafter. Peschel 

later hired defendant, William Evan 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 that 
The District Court granted a partial summary judment in 

favor of defendant Jones December 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. 

Peschel raises 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 

from his cause of action? 

1. Collateral Estoppel. 

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 to Martin Development for lost profits 

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 interest based on 

lost profits. Martin Development Co., 703 P.2d at 148, 42 

St.Rep. at 758. In the present case, plaintiff Peschel is 

bound by the facts and law as established by 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 

litigation and that Jones was entitled to summary judgment as 

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 by 
plaintiff 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 

judgment on June 5, 1987 and August 12, 1987. 

Simply stated, Peschel's claim is that Jones produced a 

defective document and offered Peschel defective legal advice 

when he presented Addenda No. 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. of paragraph 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 "Addenda No. 1. " 

c. Defendant failed to obtain the 

consent of Washington Mortgage Company 

to "Addenda No. 1" or to attempt to 

negotiate resolution of current defaults 

with that firm. 

d. Defendant advised Plaintiff that the 

consent of the foregoing parties was 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 draw No. 

13 in conjunction with carrying out 

"Addenda No. 1." 
g. Defendant advised Plaintiff that 

commitment of HUD to release Draw No. 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 still be liable. 

j. Defendant failed to include in 

"Addenda No. 1" and failed to attempt to 

negotiate provisions in said agreement 

requiring the contractor to produce lien 

waivers each month so that progress 

disbursements would not be held up. 

k. Defendant advised Plaintiff that his 

liability under 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 then pending. 

By way of its order granting partial summary judgment, the 

order denying Peschel'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) was held to still be at issue). 

In the initial order, the District Court stated Peschel 

was bound by the facts and law as established in Martin 

Development Co. v. Keeney construction Co. (Mont. 1985), 703 
P.2d 143, 42 St.Rep. 752, and the District Court litigation 

preceeding that appeal. The District Court framed Peschel's 

issue by stating: 

[Pllaintiff is not contesting whether 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 

position was 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 

defined by the pleadings and contentions 

of the parties. 

This is the crux of Peschel's argument on appeal. While 

Peschel does not challenge the fact that he is bound by the 

facts and law as established in the prior 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 District Court according to collateral estoppel. 

A party is entitled to summary judgment if the totality 

of the record shows "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. " Rule 56 (c) , M.R.C~V.P. The 

purpose of summary judgment is to promote judicial economy by 

eliminating unnecessary trials. Still, the motion should be 

granted only when there is no genuine issue as to any 

material fact and the moving party is entitled to a judgment 

as a matter of law. The initial burden of demonstrating the 

absence of any genuine issue regarding any material fact lies 

with the moving party. See, e.g. Rumph v. Dale Edwards, Inc. 

(1979), 183 Mont. 359, 600 P.2d 163. If the moving party is 

successful, the burden of proof shifts to the non-moving 

party to demonstrate the presence of a genuine issue as to 
some material fact. See, Rumph, supra; and DeWinter v. 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, 637 P.2d 509, 511. 

"Collateral estoppel or issue preclusion 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. Collateral estoppel refers 

to a preclusion of issues, as opposed to a claim. We have 

established a three-part inquiry to determine whether 

collateral estoppel 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 a party or in privity with a 

party to the prior 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 previously 
litigated 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 of his 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 

complaint would be whether defendant Jones was negligent when 

he failed to procure the consent of HUD to Addenda No. 1. 

This identical issue has not been 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. 

The District Court granted the first motion for partial 

summary judgment by 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 any material fact 

and that defendant Jones was entitled to a judgment as a 

matter of law on those issues. In other words, certain facts 

established in prior litigation now make some of Peschel's 

current claims to be without merit. Counsel for Peschel has 

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 in 
related 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, 

"problems arose concerning Peschel's obligations to fund the 

cost shortages during the course of construction." Martin 

Development Co., 703 P.2d at 145, 42 St.Rep. at 753. Addenda 

No. 1 was the result of negotiations to settle these matters 

and was not related to HUD. The parties agree that it was 

Peschel's obligation to properly 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 it would be assigned to HUD. Addenda No. 1 was 

not signed until November 10, 1979 and the consent and 

commitment of Washington Mortgage 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 judgment on these issues. 

Peschel alleges in sub-paragraphs (b), (h), and (i) 

that Jones was negligent in his advice to Peschel and in not 

obtaining the consent and a guarantee of completion from 

Martin Development's bonding 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 Development Co., 703 P.2d at 146-147, 42 

St.Rep. at 755-756. Finally, Peschel alleges in 

sub-paragraph (j) that defendant was negligent in not 
negotiating provisions "requiring the contractor to produce 

lien waivers each month so that progress disbursements would 

not be held up." However, the financing difficulties were 

entirely unrelated to this issue and the reason draw No. 13 

was not paid was because Washington Mortgage previously 

assigned the loan to HUD. Martin Development Co., 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 

additional partial 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 legal malpractice 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 shou 1 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. (Emphasis added.) 
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 

to November 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 Mortgage Company. 

(e) Defendant's release and discharge 

of the contractor, Martin, from all 

claims in Paragraph 11 of the Addenda, 

the exoneration clause. 

(k) Defendant's advice 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 

to HUD. 

(n) Defendant's failure to attach 

financial exhibits and the HUD agreement 

to the Addenda. 

Peschel claims he did not discover the facts essential to a 

cause of action until after January 25, 1984, when a district 

court decision found judgment for Martin Development and 
against Peschel in the amount of $72,000. See, 

Martin Development Co., 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 is knowledge of the facts 

essential to the cause of action, not 

knowledge of the legal theories upon 

which an action may 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 

reasonable person on inquiry, or has the 

opportunity to obtain knowledge from 

sources open to his or her 

investigation. (Sanchez v. South Hoover 

Hospital 18 Cal.3d. 93, 101, 132 

Cal.Rep. 657, 553 P.2d 1129.) If the 

plaintiff believes that someone has 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 at 
Additionally, we have specifically rejected the "damage 

rule," wherein the statute of limitations in a legal 

malpractice action would not begin to run until 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 rule would 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 determinable damages. 

Despite this holding, Peschel states the statute of 

limitations should have been tolled on his malpractice claim 

until the District Court found him liable to Martin 

Development. Peschel contends this is the time he discovered 

he had a cause of action. Upon carefully reviewing each of 

Peschel's remaining claims, it is clear that Peschel knew the 

facts giving rise to each claim and through the use of 

reasonable diligence he 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 

three years before November 14, 1982. Peschel had litigation 

pending against him, he was required to contribute more money 

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 long before November 14, 1982. After 

a careful review of all of the facts, we find that through 

the use of reasonable diligence Peschel had sufficient 

information to discover any alleged act, error or omission by 
Jones. We affirm the decision of the District Court granting 

partial summary judgment on Peschel's remaining claims. 

For the foregoing reasons, the decision of the District 

Court is affirmed. 

n 

We concur: