Berner Cheese Corp. v. Krug, 752 N.W.2d 800 (Wis. 2008)

Brief Summary
Client alleged that attorney was liable for breach of fiduciary duty as a result of an alleged attorney-client business transaction, contending that undue influence by the attorney should be presumed pursuant to Wisconsin Supreme Court Rule 20: 1.8(a).

The underlying matter involved the client’s settlement of third-party litigation, without the involvement of the attorney. The settlement released both the client and the attorney from potential liability. The Wisconsin Supreme Court held that there was not a “transaction” between the attorney and the client because the settlement did not involve “communication or activity that reciprocally affected the client and the attorney.” Accordingly, there was no violation of the ethics code regulating attorney-client business transactions sufficient to support the breach of fiduciary duty claim.

Complete Summary
Attorney Krug was outside corporate counsel for Berner Cheese (“Berner”). A Berner employee, Steinmann, had possession of some of Berner’s trade secrets. When Steinmann left Berner to work for Dairy Source, Berner executives sought Krug’s advice on retrieving the trade secrets from Steinmann and Dairy Source.

Attorney Krug offered three alternatives: (1) retrieve them with the consent of the owner of Dairy Source, (2) obtain a court order demanding return of the property, or (3) enter the Dairy Source office without consent. Krug labeled the third option “self help,” and noted that this option entailed risk of criminal liability, and concluded by stating that he had “not authorized or directed [Berner’s] entry onto [the] premises.” Id. at 804.
 
Krug advised Berner to retain litigation counsel for the purpose of retrieving any remaining property from Dairy Source. Berner retained another law firm for that purpose. Berner representatives thereafter arrived at Dairy Source during the day, announced the reason for their presence, and carried off many boxes of documents. Berner also brought suit against Dairy Source.

In response to Dairy Source’s counterclaims, Berner relied on an advice of counsel (i.e. advice of Krug) defense. This defense led Dairy Source to depose, and ultimately bring claims against Krug. Krug, concerned that his insurance would not cover such claims, asked Berner to indemnify him, but did not suggest that he possibly had a conflict of interest with Berner. Berner did not respond to Krug’s request, and when Berner decided to try to settle with Dairy Source, Berner sought a $200,000 contribution from Krug. Krug declined.

Berner executives ultimately decided to settle the case without either side’s attorneys present. As part of the settlement, Dairy Source agreed to dismiss all claims—including those against Krug. The Berner representatives who negotiated the settlement testified that they did not know how Krug’s release came about, although Berner’s litigation counsel stated that the reason was simply to make the settlement global.

Litigation counsel later sued Berner for unpaid legal fees. Berner counterclaimed for malpractice and added third party claims against Krug for legal malpractice and breach of fiduciary duty. The Krug malpractice claim was based on Krug’s advice regarding the self-help option. With respect to the breach of fiduciary duty claim, Berner argued that its settlement with Dairy Source involved an attorney-client business transaction, that such transactions presumptively involve undue influence by the lawyer, and therefore that Krug breached his fiduciary duty by failing to mitigate such influence.

The Wisconsin Supreme Court applied Wisconsin SCR 20:1.8(a) (governing lawyer-client business transactions), and held there was no attorney-client “transaction” involved in the settlement because there was no “communication or activity that reciprocally affected the client and the attorney.” The court further noted that Krug was not involved in the settlement negotiation and that Krug did not advise Berner regarding the decision to settle or on the settlement terms. The court left open the question of which party has the burden under Wisconsin law to establish undue influence or the lack thereof when there is an attorney-client business transaction.

Three justices concurred in the result but disagreed with the majority’s narrow interpretation of the term “transaction” in the rule of professional conduct. The concurrence would have concluded that the agreement to release Krug was a transaction with the client, covered by the rule. The concurrence warned of the danger of reliance on the narrow requirement of reciprocal effects in order for something to constitute a transaction of the lawyer with the client, thereby precluding a gratuity from the client , for example, as qualifying as a lawyer-client transaction.

Significance of Opinion
This opinion demonstrates that an attorney who benefits from a client’s transaction is not necessarily a party to the transaction for purposes of the rules of professional conduct governing lawyer-client transactions. The opinion further highlights the importance of giving detailed advice to clients who are considering acts that may lead to client liability, and therefore ultimately to a legal malpractice suit.

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