June 22, 2023 – A circuit court did not err by admitting evidence that the plaintiffs had previously settled with two other defendants in a legal malpractice case, the Wisconsin Supreme Court has ruled.

In Allsop Venture Partners III v. Murphy Desmond S.C., 2023 WI 43 (June 2, 2023), the supreme court also held (4-3) that while the circuit court erred by permitting the defendant’s lawyer to make a remark tying the settlement to the issue of liability, the error was harmless.

Justice Brian Hagedorn wrote the majority opinion, joined by Justice Ann Walsh Bradley, Justice Rebeca Dallet, and Justice Jill Karofsky. Chief Justice Annette Ziegler dissented, joined by Justice Patience Roggensack and Justice Rebecca Bradley.

Tentacled Transaction

In the early 2000s, Terry and Sandy Shockley sought to sell Shockley Communications Corporation (SCC), a media company in which they were minority shareholders.

Would-be buyers wanted only to purchase the company’s assets, not its stock. But an asset-only sale would be a taxable event for both the company and its shareholders.

RSM McGladrey, Inc., an accounting firm, proposed a solution – a “midco” transaction. Under the proposed transaction, SCC would sell its stock to a middle company and that company would then sell the assets to interested buyers.

Curtis, Mallet-Prevost, Colt and Mosle LLP (Curtis Mallet) advised the Shockleys that the IRS would approve the midco transaction. But the agency rejected significant parts of the deal and imposed millions in taxes and penalties against the shareholders (SCC no longer existed).

Several of the shareholders sued RSM, Curtis Mallet, and Murphy Desmond, S.C. (Murphy Desmond), the law firm that handled the stock sale to the middle company, in Dane County Circuit Court.

The Shockleys intervened. They alleged that: 1) Curtis Mallet and Murphy Desmond had committed legal malpractice; 2) RSM was negligent; and 3) Curtis Mallet and RSM had defrauded them.

Pre-trial Maneuvers

The Shockleys settled with RSM and Curtis Mallet, then amended their complaint. The amended complaint contained only the legal malpractice claim against Murphy Desmond.

At trial, the circuit court allowed Murphy Desmond to introduce evidence of the settlement for credibility purposes, and to introduce the Shockleys’ original complaint.

During closing argument, Murphy Desmond’s attorney linked the settlement to Curtis Mallet’s and RSM’s liability for the injuries allegedly suffered by the Shockleys.

The jury found that: 1) RSM and Curtis Mallet, along with Terry Shockley were negligent; and 2) RSM and Curtis Mallet had committed intentional misrepresentation.

The Shockleys moved for a new trial, but the circuit court denied the motion. When the Shockleys appealed, the Wisconsin Court of Appeals affirmed.

Exception to Evidence Rule Applies

The Shockleys argued that the circuit court erred by admitting the settlement evidence because it didn’t fit any of the exceptions listed in Wis. Stat. section 904.08.

But Justice Hagedorn pointed out that section 904.08 has an exception for bias or prejudice. And, he concluded, the circuit court acted reasonably in determining that some of the plaintiffs’ witnesses might be biased because the plaintiffs’ posture had changed as result of the settlement.

“The circuit court appeared to recognize the somewhat unusual posture of this case where two of the three central players in the dispute settled out, leaving litigation against solely the third defendant who could now be portrayed as the main culprit,” Hagedorn wrote.

“The circuit court was well aware how the Shockleys’ story changed and what their incentives at trial now were.”

Additionally, Justice Hagedorn noted, the circuit court had instructed jury members that they could use the settlement evidence only for purpose of credibility.

“This limiting instruction added a protective layer to ensure the statutory exception requiring and acceptable purpose was complied with,” Hagedorn wrote.

However, Justice Hagedorn wrote, the circuit court should “exercise the utmost caution” in deciding whether to admit settlement evidence under section 904.08.

‘A Single Dark Cloud’

Hagedorn concluded that the circuit court erred by allowing Murphy Desmond’s attorney to tie, during closing argument, the settlement to RSM’s and Curtis Mallet’s liability for the damages alleged suffered by the plaintiffs.

But, he reasoned, the error was harmless and did not warrant granting the Shockleys a new trial, given the limiting instruction and the several days of testimony that supported the jury’s finding.

“Murphy Demond’s improper comment amounted to a single dark cloud on an otherwise sunny day,” Hagedorn wrote. “The statement comprised two sentences in almost 80 pages of closing argument transcript.”

Admission of Original Complaint was Harmless Error

Justice Hagedorn reasoned that the admission of the Shockleys’ original complaint was harmless because it was, in effect, cumulative.

“The jury already knew that the Shockleys originally sued RSM and Curtis Mallet, settled, and then focused their efforts on Murphy Desmond,” Hagedorn wrote.

“In other words, neither admission nor Murphy Desmond’s use of the superseded pleadings poisoned the well – at least not enough for us to find beyond a reasonable doubt that juror knowledge of the precise allegations in the original complaint contributed to the outcome.”

Dissent: Majority’s Exception Swallows the Rule

In her dissent, Chief Justice Ziegler wrote that the majority’s interpretation of bias or prejudice exception to section 904.08 “swallows the rule and creates a back door for litigants to introduce evidence of [settlements] for prohibited purposes.”

Any case that involved the type of settlement at issue in this case would lead to a change in the plaintiff’s posture, Ziegler argued.

She also argued that the majority minimized the extent to which Murphy Desmond’s attorney mentioned the settlement during the trial.

In addition to focusing on the settlement during the opening and closing statements, Justice Ziegler pointed out, the attorney mentioned the settlement 13 times during the cross examination of Sandy Shockley.

The settlement, Ziegler wrote, “was one of Murphy Desmond’s most ‘important’ pieces of evidence for resolving the question, ‘Who did the Shockleys … really look to for advice …?’ The majority simply fails to grasp the extent to which the settlement pervaded the trial.”