Attorneys

Failure to Comply with Rules of Professional Conduct When Seeking Ownership Interest in Client’s Business as Compensation for Legal Services – SCR 20:1.8(a) – Recovery on Equitable Claims Against Client Barred

Sands v. Menard, 2016 WI App 76 (filed 20 Sept. 2016) (ordered published 26 Oct. 2016)

HOLDING: A lawyer’s failure to comply with SCR 20:1.8(a) precluded recovery on equitable claims of unjust enrichment and promissory estoppel against her client.

SUMMARY: Defendant Menard is the founder, president, and chief executive officer of Menard Inc., a chain of home improvement stores. Plaintiff Debra Sands is a lawyer who claimed that she cohabitated with Menard from 1998 until 2006 and during that time performed work for Menard and his companies.

In this lawsuit, the plaintiff brought multiple claims against Menard. Of particular note on this appeal were her equitable claims for unjust enrichment and promissory estoppel arising out of her agreement to provide legal services to Menard in exchange for an interest in his businesses.

In response to these equitable claims, Menard argued that Sands violated SCR 20:1.8(a) and that this violation is a complete bar to any claim by Sands that she is entitled to an ownership interest in Menard’s businesses based on legal services she provided.

During the time relevant to this case, SCR 1.8(a) provided as follows: “A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to the client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client; (2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and (3) the client consents in writing thereto.”

Sands did not dispute that she failed to provide the disclosures required by SCR 1.8(a) and also failed to obtain Menard’s written consent to the transaction. Nevertheless, Sands argued that her violation of SCR 1.8(a) does not bar her claims against Menard because violations of Wisconsin’s Rules of Professional Conduct can only be considered in attorney disciplinary proceedings. In an opinion authored by Judge Stark, the court of appeals rejected this argument.

“[W]e conclude that Sands’ undisputed violation of Rule 1.8(a) barred her equitable claims [of unjust enrichment and promissory estoppel].… It is axiomatic that a party seeking to recover in equity must come to court with clean hands” (¶ 38). In this case, Sands’ hands were “unclean” because she entered into a business arrangement with Menard to provide legal services in exchange for an interest in his businesses and did so without complying with the dictates of SCR 1.8(a) (¶ 39).

The appellate court rejected several arguments Sands advanced in an attempt to save her equitable claims. Among them was her contention that SCR 1.8(a) does not apply to an unjust-enrichment claim brought under Watts v. Watts, 137 Wis. 2d 506, 405 N.W.2d 303 (1987). (The Watts court held that unmarried cohabitants may raise claims based on unjust enrichment following the termination of their relationships in situations in which one of the parties attempts to retain an unreasonable amount of the property acquired through the efforts of both
(see ¶ 44).)

The court of appeals responded that the plaintiff in Watts was not a lawyer and therefore was not subject to SCR 1.8(a). “There is no exception to Rule 1.8(a) for attorneys who cohabitate with their clients, and we decline Sands’ invitation to read Watts as establishing such an exception” (id.).

Sands also argued that barring her unjust-enrichment claim in this case would mean that no lawyer could ever bring an unjust-enrichment claim under Watts against a former cohabitant. Again, the court of appeals disagreed.

  

“We merely hold that an attorney cannot bring an unjust enrichment claim under Watts to recover an ownership interest in a former cohabitant’s business (or equivalent damages) as compensation for legal services, unless the attorney complied with Rule 1.8(a). Our holding in this case does not address other circumstances in which an attorney might attempt to bring an unjust enrichment claim under Watts – for instance, a circumstance in which the attorney provided only nonlegal services to a joint enterprise with a cohabitant, or a circumstance in which the attorney contributed to a joint enterprise the salary he or she earned while working at a law firm on unrelated matters” (¶ 46).

This lawsuit also involved a counterclaim by Menard against Sands for breach of fiduciary duty. However, the court of appeals concluded that this claim was barred by the statute of limitation.

Consumer Law

Consumer Loans – Social Security Disability Benefits – Security for Loan

Lakewood Credit Union v. Goodrich, 2016 WI App 77 (filed 7 Sept. 2016) (ordered published 26 Oct. 2016)

HOLDING: A credit union violated no federal laws when it seized and liquidated deposit accounts containing funds originally received as Social Security benefits and applied those funds to the balance due on a consumer loan.

SUMMARY: Goodrich received Social Security disability benefits totaling $20,000, which he later transferred to a credit union, Lakewood, to obtain a consumer loan. Goodrich executed a consumer note for a $20,000 loan from Lakewood, which matured in August 2013. As security, he pledged the $20,000 in deposits, which had been distributed among three accounts, one in his name and two in his daughters’ names.

Goodrich failed to make the payment due in August 2013 and filed for Chapter 7 bankruptcy. It was undisputed that the $20,000 Lakewood loan and corresponding security interests were not discharged in the bankruptcy action. After Goodrich failed to cure the default, Lakewood liquidated the funds in the three depository accounts Goodrich had pledged as security.

The current case is a replevin action related to a different loan Goodrich had obtained from Lakewood. Goodrich counterclaimed that the depository accounts contained assets “exempt from seizure” because they were Social Security benefits. The circuit court granted summary judgment in Lakewood’s favor.

The court of appeals affirmed in an opinion authored by Judge Hruz. First, it rejected Goodrich’s assertion that Lakewood’s security interests in the depository accounts were void pursuant to 42 U.S.C. § 407(a); Goodrich conceded the validity of Lakewood’s arguments (for example, judicial estoppel) by failing to respond to Lakewood’s arguments on appeal.

His argument that Lakewood’s security interest was an impermissible assignment or transfer of Social Security benefits also failed. By its plain language, subsection 407(a) applied “only to the assignment of future benefits, not to benefits that have already been received” (¶ 17). “Pledging the contents of a depository account containing already received
[S]ocial [S]ecurity benefits as collateral for a loan is not an improper assignment or transfer of future benefits” (¶ 18).

Nor did Lakewood violate the “general exemption provision” of 42 U.S.C.
§ 407(a). The court rejected Goodrich’s sweeping assertion that this provision reaches “even a voluntary agreement permitting the creditor of a [S]ocial
[S]ecurity beneficiary to seize his or her accounts” containing deposited benefits
(¶ 19). Although Goodrich supported his argument with a “bevy of authorities,” they were no longer “good law” in the wake of the U.S. Supreme Court’s decision in Washington State Department of Social & Health Services v. Guardianship Estate of Keffeler, 537 U.S. 371 (2003).

Criminal Procedure

Guilty Pleas – Plea Withdrawal – Failure to Advise Defendant Regarding Immigration Consequences of Conviction – Wis. Stat. Section 971.08

State v. Reyes Fuerte, 2016 WI App 78 (filed 8 Sept. 2016) (ordered published 26 Oct. 2016)

HOLDINGS: 1) The circuit court failed to comply with the requirements of Wis. Stat. section 971.08 with regard to advising the defendant about the immigration consequences of his conviction. 2) The defendant is entitled to an evidentiary hearing to prove a causal nexus between his conviction and likely deportation.

SUMMARY: The defendant, Reyes Fuerte, pleaded guilty to a felony fleeing an officer charge and to a misdemeanor operating while intoxicated (OWI) charge. He later sought to withdraw his pleas, arguing that 1) when taking his pleas and advising him of the potential immigration consequences of his pleas, the circuit court failed to comply with both Wis. Stat. section 971.08 and the supreme court’s interpretation of that statute in State v. Douangmala, 2002 WI 62, 253 Wis. 2d 173, 646 N.W.2d 1; and 2) pursuant to the same authority, he has made a sufficient showing that one of his pleas (to the felony) was likely to result in his deportation.

The circuit court denied the motion in a nonevidentiary hearing. In a decision authored by Judge Lundsten, the court of appeals reversed.

Wisconsin Statutes section 971.08(1)(c) provides that, before a court accepts a plea of guilty or no contest, it shall “[a]ddress the defendant personally and advise the defendant as follows: ‘If you are not a citizen of the United States of America, you are advised that a plea of guilty or no contest for the offense with which you are charged may result in deportation, the exclusion from admission to this country or the denial of naturalization, under federal law.’”

In this case, the circuit court significantly deviated from the quoted statutory language and instead advised the defendant as follows: “Usually we’re looking at felonies, but any conviction to a person who is not a resident of the United States could lead, at some point in the future, to that person either being denied re-entry or that person being required to leave this country” (¶ 14).

The appellate court concluded that the circuit judge failed to give the advice required by Wis. Stat. section 971.08(1)(c) when the judge said “not a resident” instead of “not a citizen” when addressing the defendant (¶ 21). (The significance of this deviation for immigration law purposes is discussed at paragraphs 18-20 of the opinion.) A second way the circuit court failed to give the required advice was by wholly omitting one of the three immigration consequences listed in the statute, “denial of naturalization” (¶ 22).

To be entitled to plea withdrawal, the defendant had to show not only that the circuit court failed to provide the advice required by Wis. Stat. section 971.08(1)(c),
but also that his plea is “likely to result” in deportation or one of the other immigration consequences listed in the statute. See Wis. Stat. § 971.08(2).

With regard to the latter, State v. Negrete, 2012 WI 12, 343 Wis. 2d 1, 819 N.W.2d 749, established that a defendant has an initial pleading burden to make particularized allegations showing a “causal nexus” between the defendant’s plea and likely deportation. If he or she satisfies this initial pleading burden, then the defendant is entitled to an evidentiary hearing to prove the requisite causal nexus (see ¶ 27). (A hearing might not be required if the record conclusively demonstrates that the defendant is not entitled to relief (see id. n.4).)

In this case the defendant alleged that, but for his plea, he would have been eligible for a cancellation defense in his ongoing deportation proceedings, and he provided factual allegations and legal citations to support that argument. The appellate court concluded that he met his pleading burden to obtain an evidentiary hearing.

“Fairly read, Reyes Fuerte’s motion alleges that his long-term presence in the United States, along with having two United States citizen children, one of whom suffers from a very serious health problem, provided him with a substantial defense to deportation. He further sufficiently alleged that this defense was eliminated by one of his guilty pleas, thereby making deportation likely. That is, Reyes Fuerte has alleged facts showing that his status changed from an unspecified chance of deportation to a likelihood of deportation” (¶ 41).

The appellate court declined to order plea withdrawal. Many of the assertions in the defendant’s motion are simply allegations at this point. Accordingly, the court of appeals remanded the matter to the circuit court to hold an evidentiary hearing at which the defendant will have the opportunity to prove that his felony plea to fleeing an officer is likely to result in deportation (see ¶ 43).

Insurance

Underinsured Motorist Coverage – Passenger Exclusion

Pierce v. Mid-Century Ins. Co., 2016 WI App 79 (filed 29 Sept. 2016) (ordered published 26 Oct. 2016)

HOLDING: A policy exclusion barred a passenger’s claim under the driver’s underinsured motorist (UIM) coverage and did not contravene statutes on UIM coverage.

SUMMARY: Three plaintiffs were injured in a serious accident that occurred while they were riding in a car driven by Swedlund. All alleged that Swedlund was negligent. Swedlund’s insurer, Mid-Century, paid out its policy limits of $500,000, which was apportioned among the passengers and others but was insufficient to compensate them for their injuries. They also brought claims under the policy’s UIM coverage.

Mid-Century denied their claims based on the policy’s definition of an underinsured motor vehicle, which excludes a vehicle insured under the liability coverage of the policy (see ¶ 7). The circuit court ruled that the exclusion was not statutorily prohibited and dismissed the passengers’ claims.

The court of appeals affirmed in an opinion authored by Judge Lundsten. The case presented an issue of first impression (see ¶ 10). The court held that exclusion was valid under the “savings provision in Wis. Stat. § 632.32(5)(e)” (¶ 14). It assumed, however, that “standing alone” the exclusion would have been barred by Wis. Stat. section 632.32(6)(b)2.a. by excluding the plaintiffs’ claims for bodily injury payments under the policy’s UIM coverage while covering them under the liability provision (see ¶ 15).

Similar to prior case law, “the exclusion at issue prevents the passengers from ‘piggybacking’ UIM coverage onto liability coverage under the same policy” (¶ 24). Put differently, the exclusion’s “main purpose” was to prohibit piggybacking – not to exclude the plaintiffs because they were passengers in the car (id.).

“In sum, we assume, without deciding, that the UIM coverage exclusion here would be prohibited by Wis. Stat. § 632.32(6)(b)2.a. standing alone but that § 632.32(5)(e) saves the exclusion because the exclusion excludes passengers only incidentally to the exclusion’s main purpose” (¶ 25).