‘Case Within a Case’ Approach Isn’t Apt When Prior Suit Alleged Breach of Contract

By Samson Habte  

Jan. 13 --The traditional “case within a case” standard used to assess a malpractice claim should not be used where the underlying matter the lawyer allegedly botched involved a breach of contract claim against the client, the South Dakota Supreme Court held Jan. 8 (Peterson v. Issenhuth, 2014 BL 5814, S.D., No. 26669-a-LSW, 1/8/14).

“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 court said in an opinion by Justice Lori S. Wilbur.

“The client would never be able to show success in the underlying action,” Wilbur continued.

Accordingly, the court explained, the “more appropriate analysis” in such a scenario is to ask directly whether the lawyer's conduct “proximately caused actual injury, loss, or damage” to the client.

Left in the Dark

The plaintiffs, Dennis and Debra Peterson, sued attorney Thomas M. Issenhuth and his firm, alleging that they failed to properly defend the Petersons' interests in a breach of contract action that had been filed against them.

“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.”


Justice Lori S. Wilbur

The underlying lawsuit involved two lakefront lots that the Petersons sold to H&S Builders Inc. for $110,000. The purchase agreement, which Issenhuth drafted, obligated the Petersons to provide water, sewer service and a gravel road within 10 months. The Petersons were accused of breaching that obligation.

The Petersons decided to refund $50,000 to H&S. They did so “without seeking the advice of counsel,” the court said. No further payments were made, however, and H&S sued for breach of contract.

The Petersons then reengaged Issenhuth, who filed an answer denying the breach and asserted as a counterclaim that the refunds “were wrongfully made due to intimidation and for the purpose of avoiding litigation.”

Shortly thereafter, H&S served Issenhuth with requests for admission, but the lawyer did not respond to the requests or inform the Petersons that he received them. H&S then moved for summary judgment. Issenhuth also failed to respond to that motion, which the trial court granted in September 2010.

The trial court entered a $104,628 judgment against the Petersons, with credit given for the $50,000 refunds. The court further ordered the Petersons to reconvey the two lots to H&S once the judgment was satisfied.

According to the opinion, the Petersons were never informed of that judgment. They also were left in the dark about a general offer to settle that H&S's counsel extended shortly before the summary judgment ruling. Additionally, the court said, Issenhuth failed to convey two specific offers to settle made after the judgment was entered.

The Petersons learned of the September 2010 judgment five months later, when one of H&S's owners called to ask whether they were considering the settlement offer. The Petersons then reached out to Issenhuth who, the court said, failed to return their calls.

After visiting Issenhuth one month later, the Petersons said they were told that their presence at the summary judgment hearing was unnecessary, and that “the case was decided upon paperwork, not testimony.” Issenhuth also failed to convey yet another settlement offer that he received after meeting with the Petersons, Wilbur said.

Malpractice Claim Dismissed

The Petersons eventually fired Issenhuth and hired new counsel who tried to reopen the summary judgment proceedings. A hearing was scheduled, but before it occurred the Petersons hired a third lawyer who negotiated a settlement that permitted H&S to retain the two lots plus an additional one, and required the Petersons to pay H&S $1,000.

The Petersons then commenced the present malpractice action. Issenhuth failed to timely answer their complaint and a default judgment as to liability (duty and breach) was entered against him. The matter proceeded to trial on the issues of causation and damages.

“In examining whether Issenhuth's 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 opinion states. The trial court dismissed the suit.

“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,” Wilbur explained.

Wrong Standard, Right Result

The supreme court affirmed the dismissal of the Petersons' malpractice claim. In doing so, however, it held that although the trial court reached the correct result, it did not apply the correct legal standard.

“While we have previously stated that the 'case within a case' standard 'is the accepted and traditional means of resolving the issues involved in the underlying proceedings in a legal malpractice action[,]' strict adherence to this traditional standard is misplaced in an attorney malpractice case involving an underlying breach of contract action,” Wilbur said.

“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,” she explained.

A “more sensible approach” would be to ask whether “Issenhuth's conduct proximately caused actual injury, loss, or damage to Petersons” without conducting a trial within a trial, the court said.

Proximate Cause Not Proven

Applying the proximate cause test, the supreme court then determined that the trial judge's conclusion was ultimately correct.

“The record demonstrates that 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,” Wilbur explained. “Indeed,” she added, “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.”

The court rejected the plaintiffs' evidentiary proffers of their alleged damages.

“The record supports the circuit court's finding that there was no evidence presented that the September 2010 judgment affected Petersons' credit rating,” Wilbur said, taking up one claim. Nor was there evidence supporting the Petersons' claim that they were forced to sell other lots for substantially less value in order to “keep afloat,” she added.

The Petersons also “failed to show how a better settlement could have been negotiated had it not been for Issenhuth's conduct,” Wilbur said. She noted that the testimony of the Petersons' replacement counsel was “vague on how a better settlement could have been brokered or on what better terms.”

The Petersons were represented by Ronald A. Parsons Jr., of Johnson, Heidepriem & Abdallah LLP, Sioux Falls, S.D., and by Bruce M. Ford, Watertown, S.D. Issenhuth and his firm were represented by Dennis C. McFarland, Sioux Falls.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/DENNIS_PETERSON_and_DEBRA_PETERSON_Plaintiffs_and_Appellants_v_TH.

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