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Mrozek v. Intra Financial Corp.6/9/2005
's costs depleted the initial $500,000 raised and it became delinquent in payments to IFC, IFC sent a Notice of Intent to file a construction lien against the motel property, and on April 29, 1993, it filed a construction lien. IFC then initiated a lawsuit to collect unpaid bills and to foreclose its lien.
In late 1993, Mallery withdrew from representing Mrozek and PMI. However, prior to Mallery's withdrawal, Mrozek was charged with thirteen counts of willfully failing to disclose material facts under Wis. Stat. § 551.41(2) (2001-02), in connection with PMI's sale of notes for the motel project. Mrozek obtained other counsel, and pursuant to a plea agreement, pled guilty to two counts of felony securities fraud under § 551.41(2) and to three counts of misdemeanor theft by fraud, under Wis. Stat. § 943.20(1)(d). The court placed her on probation for the misdemeanor theft convictions, with jail time and restitution as conditions. Judgment on the felonies was withheld pursuant to a deferral agreement between Mrozek and the State.
In 1994, because of a lack of funds to pay outstanding construction bills and complete the motel's construction, PMI filed a voluntary Chapter 11 bankruptcy . The bankruptcy filing stayed a pending sheriff's sale of the motel property that had been ordered in IFC's lien foreclosure action. Schedules that PMI filed with its bankruptcy petition listed a claim against Mallery for the negligent delivery of legal services as an asset of PMI, and also identified Mallery as an unsecured creditor of PMI for unpaid legal bills. However, Mallery never filed a proof of claim in the bankruptcy action. Pursuant to a stipulation, the motel property and AmericInn franchise rights were transferred to IFC, who in turn transferred them to another corporation that operated the motel thereafter.
IFC then moved to convert the bankruptcy from a Chapter 11 reorganization to a Chapter 7 liquidation, asserting that "because no longer owns the Property, has no assets of substance, no business, no income, cannot generate funds to pay various expenses, and is completely unable to effectuate a [reorganization] plan," as required under Chapter 11. The bankruptcy court granted the motion over PMI's objection. The court appointed a trustee for the bankruptcy estate who would, in the words of the bankruptcy judge, "review the situation and determine . . . whether there were any assets which should be pursued." The trustee chose not to pursue the scheduled claim against Mallery, but did unsuccessfully pursue a claim against IFC for "disgorgement" of excess profits. The trustee then reported to the court that, after "diligent inquiry," there were "no assets in the estate" that were not either "inconsequential in value or burdensome to the estate." The trustee's report also recited that it constituted an "abandonment of all scheduled property of the bankruptcy estate." The bankruptcy court discharged all remaining debts against PMI and closed the estate.
Mrozek and PMI thereafter commenced this action against Mallery, alleging in an amended complaint that the firm was negligent in its legal representation of both Mrozek and PMI and that Mallery also breached fiduciary duties it owed to them. The circuit court granted summary judgment to Mallery on Mrozek's claim, concluding that her guilty plea precluded her malpractice claim against Mallery for any damages arising out of her criminal conviction. The circuit court also granted summary judgment dismissing PMI's negligence claim against the law firm after concluding that the doctrine of claim preclusion prevented PMI from re-litigating a claim that could have been raised and resolved as a part of the bankruptcy proceedings. F
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