Opinion ID: 1873143
Heading Depth: 4
Heading Rank: 1

Heading: Attorney-client transaction

Text: ¶ 40 The elements of a claim for breach of fiduciary duty are: (1) the defendant owed the plaintiff a fiduciary duty; (2) the defendant breached that duty; and (3) the breach of duty caused the plaintiff's damage. Reget v. Paige, 2001 WI App 73, ¶ 12, 242 Wis.2d 278, 626 N.W.2d 302. ¶ 41 Wisconsin law has long recognized that attorneys owe a fiduciary duty of loyalty to their clients, e.g., In re Law Examination of 1926, 191 Wis. 359, 362, 210 N.W. 710 (1926). An attorney may breach that duty when he enters into a transaction with his client without fully informing the client of the risks that the transaction will potentially benefit the attorney and will potentially disadvantage the client. See Zastrow v. Journal Commc'ns, Inc., 2006 WI 72, ¶ 30, 291 Wis.2d 426, 718 N.W.2d 51. Indeed, we have promulgated a Supreme Court Rule forbidding lawyers licensed in Wisconsin from entering into business transactions with clients, unless they ensure the presence of certain safeguards. [10] SCR 20:1.8(a). ¶ 42 Berner is correct in asserting that the Restatement (Third) of the Law Governing Lawyers § 126 (2000) (Restatement § 126) presumes that transactions between attorneys and clients are tainted by undue influence. Berner is also correct in asserting that Restatement § 126 places the burden on an attorney who enters into a transaction with a client to show that he did not impose undue influence on the client. [11] However, we have not yet adopted Restatement § 126 as Wisconsin law. Furthermore, we do not need to decide whether to do so here because Berner has failed to prove that the settlement between Berner and Dairy Source constitutes a transaction between Krug and Berner. ¶ 43 The undisputed testimony is that Ed and Steve Kneubuehl personally met with Rose and Tony Steinmann and negotiated for the dismissal of all of Dairy Source's claims against Berner. The payment of $1.35 million to Dairy Source by Berner was agreed to at that meeting. The testimony shows that the Kneubuehls did not know how Krug's name came to be listed among those released from claims in the settlement document; they did not request it. Therefore, Berner did not bargain to pay Dairy Source $1.35 million for a release that included Krug. In sum, there is nothing in the record to demonstrate that Berner's settlement with Dairy Source for the payment of $1.35 million was a transaction between Berner and Krug. The settlement was a transaction between Berner and Dairy Source. ¶ 44 That the settlement was not an attorney-client transaction is even more apparent upon review of those occasions when we have evaluated actual transactions between attorneys and clients. For instance, in In re Disciplinary Proceedings Against Peckham, 2000 WI 17, 233 Wis.2d 28, 606 N.W.2d 170, in the context of a disciplinary proceeding, we evaluated the conduct of Peckham, who accepted a loan from a client. Id. ¶¶ 7, 10. Peckham had appeared at a July 1997 pretrial conference short on cash and asked a client to loan him $500. Id., ¶ 7. Peckham scribbled out a promissory note indicating he would return payment with 12 percent interest by September 5, 1997. Id., ¶ 7. The client agreed to the terms. Id. Peckham received the money and his client provided that money. We affirmed that the loan constituted a business transaction between an attorney and a client. Id., ¶ 10. ¶ 45 Armstrong v. Morrow, 166 Wis. 1, 163 N.W. 179 (1917), provides another example of an attorney engaging in a transaction with his client. There, an attorney, Morrow, represented a client, Phillips, in a matter in which Phillips had agreed to loan Oconto Brewing Company $10,900. Id. at 3, 163 N.W. 179. However, Phillips was $1,250 short of the full amount needed to complete his loan to Oconto Brewing. Id. Attorney Morrow contributed the $1,250 balance. Id. Oconto Brewing issued Phillips a mortgage to secure its debt. Id. Morrow and Phillips had a tacit understanding that Phillips would repay Morrow at Phillips' convenience. Id. However, they also agreed that Morrow would retain possession of the Oconto Brewing mortgage and promissory note until Phillips repaid the $1,250, with interest. Id. ¶ 46 Approximately a year and a half later, Morrow drafted an assignment of the Oconto Brewing mortgage to him. Id. Phillips signed the assignment, which Morrow recorded. Id. Morrow provided Phillips no additional consideration in return for the additional benefit he received from the assignment of the mortgage. Id. ¶ 47 We held that the assignment prepared by Morrow was presumptively invalid. Id. at 8, 163 N.W. 179. As we stated, it is incumbent upon the attorney in a case like the one at bar to show affirmatively either that he paid an adequate consideration for the property, or that a gratuity was intended and that no advantage was taken of the confidential relations existing between the attorney and his client to obtain it. Id. at 7, 163 N.W. 179. Armstrong shows a giving up of an asset by the client and a taking of the asset by the attorney as evidence of their transaction. ¶ 48 Other cases from outside Wisconsin provide additional examples of attorney-client transactions. For example, In re Smith, 572 N.E.2d 1280, 1286 (Ind.1991), the Indiana Supreme Court held that Smith had engaged in a transaction with a client, Mary Maxon, when the attorney made gifts to himself, his family, and employees of his law firm from the entrusted assets of an elderly, mentally incompetent client. [12] Once again, the attorney-client transaction involved a giving up of an asset by the client and a taking of the asset by the attorney. ¶ 49 In Duggan v. Gonsalves, 65 Mass. App.Ct. 250, 838 N.E.2d 614 (2005), the Appeals Court of Massachusetts held that Duggan engaged in a transaction with his client, when he purchased his client's house at foreclosure for substantially less than the appraised value, then rented the property back to the client for the equivalent of the mortgage payment. The attorney-client transaction was evidenced by the attorney benefiting himself at the expense of the client. ¶ 50 The cases reviewed above demonstrate that the Berner-Dairy Source settlement is patently different from transactions between attorneys and clients that courts have reviewed under claims that they were improper. In all the cases we have located where attorney-client transactions were involved, there was a communication or activity that reciprocally affected the client and the attorney. That is, one party gave up something and the other party received something at the expense of the one who relinquished it. Our understanding of a transaction is consistent with that set out in Black's Law Dictionary, which defines transaction as, An agreement that is intended by the parties to prevent or end a dispute and in which they make reciprocal concessions. Black's Law Dictionary 1535 (8th ed.2004). ¶ 51 In contrast, there is no evidence that the Berner-Dairy Source settlement embodies reciprocal activity affecting Berner and Krug. Krug was not involved in Berner's decision to pay Dairy Source in a settlement. That determination was made in a meeting between Berner and Dairy Source. Accordingly, Dairy Source, not Krug, is the party with whom Berner engaged in reciprocal activity. Berner paid Dairy Source $1.35 million dollars and in return received from Dairy Source its commitment not to use, distribute or copy Berner's proprietary information, including its recipes, pricing information, and formulas. In addition, the parties agreed to drop all claims against each other and to refrain from filing new suits against each other. Therefore, Berner gave up nothing to Krug when it agreed to pay Dairy Source $1.35 million as settlement. The settlement negotiation that resulted in the settlement was a transaction between Berner and Dairy Source, not between Berner and Krug. ¶ 52 Furthermore, Brennan, not Krug, represented Berner in the litigation with Dairy Source. Berner does not dispute that its attorneys at Brennan were engaged with Dairy Source representatives in drafting the settlement document. Moreover, the admissions by Ed and Cheryl Kneubuehl belie Berner's claim that, because the settlement document releases Krug from all claims, the settlement was the product of undue influence. When asked whether Krug had any input into the settlement amount, Ed Kneubuehl testified that Krug had not. Cheryl Kneubuehl also testified that she did not recall Krug having any input in the settlement. ¶ 53 Therefore, although the settlement document may have conferred a benefit on Krug, there is no evidence that releasing Krug came at a cost to Berner, and thereby affected the parties reciprocally. Furthermore, although it is possible that some finite value could be attributed to the release of Krug, Berner has not presented any evidence to show what that value may be. For example, Berner has not presented any evidence that the cost of its settlement was increased due to Krug's release. Berner instead alleges that the full cost of the settlement agreement, $1.35 million, constitutes its damages for releasing Krug. No credible evidence supports Berner's claim in this regard. ¶ 54 Berner also has contended that it is entitled to a presumption that the settlement was the product of undue influence. The party seeking the benefit of a presumption carries the burden of establishing that presumption. See Patterson v. Jensen, 246 Wis. 319, 345-46, 17 N.W.2d 423 (1945). Because the settlement was not a transaction between Berner and Krug, Berner has failed in its proof that it is entitled to the presumption it seeks. [13] See Restatement § 126. Therefore, the burden remained with Berner to show that Krug's inclusion in the settlement was a breach of Krug's fiduciary duty that caused Berner damages.