Peterson v. Issenhuth , 2014 S.D. LEXIS 1 ( 2014 )

#26669-a-LSW
2014 S.D. 1
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
****
DENNIS PETERSON and
DEBRA PETERSON, Plaintiffs and Appellants,
v.
THOMAS M. ISSENHUTH and
ISSENHUTH & LEIBEL, LLP, Defendants and Appellees.
****
APPEAL FROM THE CIRCUIT COURT OF
THE THIRD JUDICIAL CIRCUIT
LAKE COUNTY, SOUTH DAKOTA
****
THE HONORABLE GENE PAUL KEAN
Retired Judge
****
RONALD A. PARSONS, JR. of
Johnson, Heidepriem & Abdallah, LLP
Sioux Falls, South Dakota
and
BRUCE M. FORD
Watertown, South Dakota Attorneys for plaintiffs
and appellants.
DENNIS C. MCFARLAND
Sioux Falls, South Dakota Attorney for defendants
and appellees.
****
CONSIDERED ON BRIEFS
ON NOVEMBER 4, 2013
OPINION FILED 01/08/14
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WILBUR, Justice
[¶1.] Dennis and Debra Peterson (Petersons) sued their attorney, Thomas
Issenhuth and Issenhuth and Leibel, LLP (Issenhuth), for legal malpractice
claiming that Issenhuth failed to properly represent Petersons’ interests in a breach
of contract action brought against Petersons by H&S Builders, Inc. (H&S). The
circuit court denied Petersons relief in the legal malpractice action for failing to
prove proximate cause or damages. Petersons appeal. We affirm.
FACTS AND PROCEDURAL BACKGROUND
[¶2.] On May 22, 1990, Petersons purchased a 22.34-acre tract of land at
Johnson’s Point, situated adjacent to Lake Madison. The property contained some
outbuildings. Petersons renovated one of the outbuildings and converted it into a
convenience store, bait shop, and small café. The store was eventually known as
The Point. Petersons purchased the property with the intention of developing and
selling 29 platted residential lots to individuals.
[¶3.] Petersons sold two lots (lots 23 and 24) to H&S for $55,000 each on
August 23, 2006. Petersons hired Issenhuth to prepare a purchase agreement for
the parties. The purchase agreement bound Petersons to provide water, sewer
service, and a gravel road to lots 23 and 24 before June 1, 2007. The purchase
agreement contained a mandatory arbitration provision to resolve any dispute that
arose between Petersons and H&S.
[¶4.] In late 2007, a dispute arose when H&S claimed that Petersons
breached the purchase agreement by not providing water, sewer service, and
graveled roads to lots 23 and 24 by the agreed date of June 1, 2007. Following
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discussions between Petersons and H&S, Petersons apparently refunded two
$25,000 lot payments to H&S. One payment occurred on April 16, 2008, and the
other on June 3, 2008. Petersons decided to make these payments without seeking
advice of counsel. No further payments were made by Petersons. H&S sued
Petersons on November 19, 2009, alleging that Petersons had breached the August
2006 purchase agreement. 1
[¶5.] Petersons retained Issenhuth to defend them in the lawsuit.
Issenhuth prepared an answer and a counterclaim on December 18, 2009. In the
counterclaim, Petersons alleged that the two $25,000 lot payments were wrongfully
made due to intimidation and for the purpose of avoiding litigation. Petersons
demanded the return of both payments and claimed that they had not breached the
purchase agreement. Curiously, Issenhuth, who drafted the purchase agreement
with the mandatory arbitration provision, did not request that the parties engage in
arbitration to resolve the dispute.
[¶6.] On June 8, 2010, H&S served Issenhuth with requests for admissions.
Issenhuth did not respond to the requests nor did he inform Petersons that he had
received the requests. Because of Issenhuth’s failure to respond to the requests for
admissions, counsel for H&S filed the summons, complaint, and admission of
service on August 6, 2010. Thereafter, the requests for admissions were deemed
admitted by the circuit court. H&S then filed a motion for summary judgment,
accompanied by a statement of undisputed material facts and affidavits detailing
1. The summons, complaint, and admission of service were not filed until
August 6, 2010.
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Petersons’ breach of the purchase agreement. Issenhuth, who had been served with
the summary judgment motion, did not file any resistance to the motion.
[¶7.] The circuit court granted H&S’s motion for summary judgment on
September 28, 2010 (September 2010 judgment). Issenhuth attended the summary
judgment hearing. The order for summary judgment indicated that Issenhuth filed
no documents other than an unsigned set of answers. The order awarded a
judgment to H&S in the amount of $104,628.82. This amount consisted of the
$60,000 balance H&S paid to buy lots 23 and 24 plus prejudgment interest at the
rate of ten percent. The award gave Petersons credit for the $50,000 refund
payment Petersons made to H&S. The judgment required H&S to reconvey lots 23
and 24 to Petersons once the judgment was satisfied. Notice of the entry of
judgment was sent to Issenhuth on September 29, 2010. Issenhuth, however, did
not notify Petersons of the entry of judgment.
[¶8.] Less than a week before the circuit court’s grant of summary
judgment, H&S’s counsel contacted Issenhuth extending a general offer of
settlement of the case. Issenhuth did not respond. On November 10, 2010, H&S’s
counsel wrote to Issenhuth with a specific offer to settle, yet this offer went
unanswered by Issenhuth. An additional letter containing an offer to settle was
sent on February 11, 2011. Again, there was no response from Issenhuth.
[¶9.] Petersons learned of the September 2010 judgment in early March
2011 when one of H&S’s owners called Dennis Peterson and asked him “how
[Petersons] were coming on deciding on the offer that [H&S] had introduced to
[Petersons].” When Dennis informed the caller that he had not been apprised of any
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new developments, the caller told Dennis that a judgment had been taken against
Petersons several months earlier. Based on this information, Petersons attempted
to contact Issenhuth. Their repeated telephone calls went unreturned. In April
2011, Petersons visited with Issenhuth and Issenhuth informed Petersons that the
circuit court would not have permitted any testimony at the summary judgment
hearing so it was unnecessary for the Petersons to appear at that hearing. Dennis
testified that Issenhuth informed them “that the case was decided upon paperwork,
not testimony.”
[¶10.] Also in April 2011, H&S’s counsel called Issenhuth about a settlement
and a letter from H&S’s counsel followed the phone call. Issenhuth did not respond.
Issenhuth never communicated the offers to settle to Petersons even though
Petersons had been in communication with Issenhuth.
[¶11.] Petersons eventually fired Issenhuth and hired a new attorney, Bruce
Ford, to assist them. On June 17, 2011, Ford filed a motion to reopen the grant of
summary judgment in favor of H&S. A hearing date was set for the motion, but
before the hearing could occur, Petersons hired another attorney, Chris Giles, to try
to settle the case with H&S. Giles contacted H&S’s counsel and a settlement
agreement was negotiated between the parties in late August 2011. The settlement
allowed H&S to retain lots 23 and 24, conveyed lot 27 to H&S, and required
Petersons to pay H&S $1,000. Ultimately, Ford abandoned his motion to set aside
the summary judgment when he learned of the settlement agreement. Final
satisfaction of the judgment was filed on January 26, 2012.
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[¶12.] During that same time, Petersons sold The Point and an additional lot
for a total of $135,000. At the trial, Petersons presented the testimony of local
realtor, Jeff Lechner, to demonstrate their claimed damages. Lechner assessed the
value of The Point’s business operation ($40,000), the land it was on ($100,000), the
liquor license ($40,000), the equipment ($5,000 to $8,000), and the ongoing business
($10,000 to $15,000).
[¶13.] On July 16, 2012, Petersons commenced this legal malpractice case
against Defendants. Issenhuth did not respond to the summons and complaint
until after September 7, 2012, when Ford moved for a default judgment on the legal
malpractice case. Issenhuth eventually filed an answer to the complaint on
September 26, 2012. In its first memorandum decision, the circuit court remarked:
The Answer did not address the merits of the Complaint. In the
Answer[,] Issenhuth complained that [the circuit court] should
not have signed the Order granting Summary Judgment citing
all sorts of meaningless South Dakota Code references dealing
with the time the order was signed which Issenhuth claimed
affected [the circuit court’s] jurisdiction. It was a mere
obfuscation. When Ford informed Issenhuth that the litigation
in Civ. 10-202 [the underlying breach of the purchase agreement
file] had been settled, Issenhuth indicated that he was unaware
of that event. Obviously, he had not looked at the Clerk’s File
Civ. 10-202.
The circuit court entered a default judgment as to liability (duty and breach) in
favor of Petersons because Issenhuth failed to demonstrate that he had a
meritorious defense and, without excuse, failed to timely answer the summons and
complaint.
[¶14.] Following waiver of a jury trial, the parties proceeded to a court trial
on the issues of proximate cause and damages. In examining whether Issenhuth’s
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negligence proximately caused any damages to Petersons, the circuit court
considered whether Petersons could demonstrate that they would have prevailed at
trial or arbitration on the underlying breach of contract claim, the “case within a
case” standard. The circuit court determined that Petersons could not demonstrate
that they would have been successful at trial or arbitration on the underlying
breach of contract claim. Ultimately, the circuit court concluded that Petersons
failed to prove they suffered any damages that were proximately caused by
Issenhuth’s negligent representation. Petersons appeal the circuit court’s ruling on
proximate cause and damages.
STANDARD OF REVIEW
[¶15.] The circuit court’s findings of fact are reviewed “under the clearly
erroneous standard.” Eagle Ridge Estates Homeowners Ass’n, Inc. v. Anderson,
2013 S.D. 21, ¶ 12, 827 N.W.2d 859, 864. Conclusions of law are reviewed by this
Court de novo. Id. ¶ 13, 827 N.W.2d at 864-65. “On review, this Court defers to the
circuit court, as fact finder, to determine the credibility of witnesses and the weight
to be given to their testimony.” Hubbard v. City of Pierre, 2010 S.D. 55, ¶ 26, 784
N.W.2d 499, 511.
DECISION
[¶16.] Petersons contend that the circuit court’s decision was based upon an
incorrect interpretation of the law on proximate cause in a legal malpractice action.
Petersons argue that the circuit court incorrectly found that Petersons were not
entitled to any damages because Petersons did not establish that they would have
prevailed against H&S at trial or arbitration of the breach of contract claim, or the
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“case within a case” standard. Petersons assert that a plaintiff need not always
establish proximate cause using only the “case within a case” standard.
[¶17.] “To prevail in a legal malpractice claim, a plaintiff must prove: (1) the
existence of an attorney-client relationship giving rise to a duty; (2) the attorney,
either by an act or failure to act, breached that duty; (3) the attorney’s breach of
duty proximately caused injury to the client; and (4) the client sustained actual
damage.” Chem-Age Indus., Inc. v. Glover, 2002 S.D. 122, ¶ 24, 652 N.W.2d 756,
767. “[P]roximate or legal cause” is defined as “a cause that produces a result in a
natural and probable sequence and without which the result would not have
occurred. Such cause need not be the only cause of a result. It may act in
combination with other causes to produce a result.” Estate of Gaspar v. Vogt, Brown
& Merry, 2003 S.D. 126, ¶ 6, 670 N.W.2d 918, 921. See Weiss v. Van Norman, 1997
S.D. 40, ¶ 13, 562 N.W.2d 113, 116-17 (stating that “proximate cause” is “[a]n
immediate cause and which, in natural or probable sequence, produced the injury
complained of . . . . Furthermore, for proximate cause to exist, the harm suffered
must be found to be a foreseeable consequence of the act complained of” (quoting
Musch v. H-D Coop., Inc., 487 N.W.2d 623, 624 (S.D. 1992))).
[¶18.] Here, the circuit court held that Petersons did not establish that they
would have received a more favorable result at trial or arbitration of the breach of
contract claim brought against Petersons. While we have previously stated that the
“case within a case” standard “is the accepted and traditional means of resolving the
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issues involved in the underlying proceedings in a legal malpractice action[,]” 2 strict
adherence to this traditional standard is misplaced in an attorney malpractice case
involving an underlying breach of contract action. Adherence to the “case within a
case” standard in this context could foreclose an aggrieved client from ever
recovering against his or her attorney if the client did in fact breach the contract.
The client would never be able to show success in the underlying action. Rather, for
a more sensible approach to analyzing an attorney malpractice case involving an
underlying breach of contract action, we look to our standard in Staab v. Cameron,
351 N.W.2d 463 (S.D. 1984) and Weiss v. Van Norman, 1997 S.D. 40, 562 N.W.2d
113, for guidance. “[A]ctions of the defendant attorney in a malpractice action
[cannot] be the proximate cause of plaintiff[ ] [client’s] losses under a contract [that]
existed before the attorney became involved in the transaction.” Weiss, 1997 S.D.
40, ¶ 13, 562 N.W.2d at 117 (citing Staab, 351 N.W.2d at 466). “This is of critical
importance, since an attorney is liable in a malpractice action only for losses
actually sustained as a proximate result of the conduct of the attorney.” Id.
(quoting Staab, 351 N.W.2d at 466). Accordingly, in this attorney malpractice case
involving an underlying breach of contract action, the more appropriate analysis is
found in our precedent set forth in Staab and Weiss: Whether Issenhuth’s conduct
proximately caused actual injury, loss, or damage to Petersons. The circuit court’s
reliance on the “case with in a case” standard in this case was misplaced.
[¶19.] Even so, the circuit court correctly determined that Petersons failed to
prove that they suffered any damages as a proximate result of Issenhuth’s conduct.
2. Haberer v. Rice, 511 N.W.2d 279, 285 (S.D. 1994).
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“Damages are speculative, not when the amount is uncertain, but when the fact of
damages is uncertain.” Bailey v. Duling, 2013 S.D. 15, ¶ 35, 827 N.W.2d 351, 363.
[¶20.] Initially, we note that Issenhuth can only be held liable for “losses
actually sustained as a proximate result of [Issenhuth’s] conduct[.]” Staab, 351
N.W.2d at 466. The record demonstrates that like Staab, Petersons’ “damage” was
a direct result of Petersons’ breach of the contract and actions thereafter, which
occurred before Issenhuth’s involvement with the underlying breach of contract
case. Indeed, Petersons did not seek the advice of Issenhuth on the breach of
contract until after Petersons breached the contract and made the two $25,000
payments to H&S.
[¶21.] The record supports the circuit court’s finding that there was no
evidence presented that the September 2010 judgment affected Petersons’ credit
rating. As the circuit court noted, no witness from a bank testified that Petersons
could not borrow money or that their credit had declined. Based on this record, the
circuit court could not evaluate the damages Petersons claimed they suffered as a
result of any effect the judgment had on their credit rating.
[¶22.] Further, there was no evidence to support Petersons’ assertion that
because of the September 2010 judgment, they were forced to sell The Point and
additional property for substantially less value in order to “keep afloat.” The
purchasing party testified that he approached Petersons first about buying The
Point. There is no evidence that the sale of The Point was forced or urgent as
Petersons initially refused the offer to purchase, but later entered into negotiations
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to sell it. And the purchasing party testified that he was never informed by
Petersons about the September 2010 judgment.
[¶23.] Additionally, the circuit court found Lechner’s testimony concerning
the value of The Point at the time of sale to be “short on paperwork, comparable
sales and analysis.” We agree. The record reflects that Lechner tried to use the
sale of a bar in another small town as a comparison sale; however, the sale of that
bar never took place. Lechner also evaluated The Point one and one-half years after
the purchasing party had acquired the property and after the purchasing party had
made physical alterations to the property. And, Petersons never contacted Lechner
when they were negotiating with the eventual buyer of The Point to establish a
market price.
[¶24.] The record also demonstrates that the business phase of The Point was
marginal. Based on his review of The Point’s business tax forms, Gary Ritzman, an
accountant and a witness at trial, placed a low value on the business, perhaps even
a value of zero. The circuit court found Ritzman’s testimony to be credible and
relied upon his testimony to determine that the business was indeed marginal in
value. We “defer[ ] to the circuit court, as fact finder, to determine the credibility of
witnesses and the weight to be given to their testimony.” Hubbard, 2010 S.D. 55, ¶
26, 784 N.W.2d at 511.
[¶25.] Lastly, as found by the circuit court, Petersons failed to show how a
better settlement could have been negotiated had it not been for Issenhuth’s
conduct. The circuit court determined that Attorney Giles’s “testimony was vague
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on how a better settlement could have been brokered or on what better terms.”
Based on our review of the record, we agree. Giles testified:
Q: I guess I just - - is - - was the $104,000 Judgment just
absolutely a hurdle at every stage of your negotiations involved
with the Petersons?
A: When I started the settlement negotiations it was somewhat
- - somewhat like negotiating with a gun to your head. Because
they didn’t have any money to pay off the Judgment, they had
the land. But they couldn’t sell the land to pay off the
Judgment. And so they - - they were caught in a situation of
they had resources, but it was the land. And unless they could
negotiate a release from H&S, they couldn’t do anything with
the land. And they - - they were not able to go to Mr. Wiedman,
their private financer, or my understanding to any financial
institution, because there was [$]104,000, plus additional
interest, that was out there. So it was difficult, and I felt like we
ended up having to give more than what was appropriate, but
we didn’t have a choice.
Q: How would your negotiating position have changed, had
these negotiations occurred before the Judgment was filed in
September 2010?
A: We would have been in a much better position, because they
already paid $50,000. And it would have started along the lines
of keep the two lots, and keep that cash, or something and be
done. And if you back up even further, it could have even been a
better position. The earlier on I felt that I would have been
involved maybe a better outcome would have occurred.
Giles did not describe how the arbitration would have produced a better or more
favorable result for the Petersons either on the breach of contract issue or the actual
amount of an arbitration award. And while Giles testified that Petersons were in a
difficult position because they lacked cash reserves to pay the September 2010
judgment, a lack of cash reserves was not caused by Issenhuth’s conduct, but
rather, as the circuit court found, was a product of a lack of lot sales and flat
economy at the time. Therefore, it was difficult for the circuit court, and this Court,
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to deduce whether the Petersons actually suffered any loss because of the
settlement.
CONCLUSION
[¶26.] Under these specific facts, the circuit court’s strict application of the
“case within a case” standard to evaluate proximate cause in the legal malpractice
action was misplaced. However, we see no clear error in the circuit court’s finding
that Petersons failed to prove damages sustained as a proximate result of
Issenhuth’s conduct. Accordingly, we affirm.
[¶27.] GILBERTSON, Chief Justice, and KONENKAMP, ZINTER and
SEVERSON, Justices, concur.
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