author: N. PATRICK CROOKS, J.

text:
    Thomas Jones and Joan Jones, Plaintiffs-Appellants, v. Secura Insurance Company, Defendant-Respondent.
    Supreme Court

      No. 00-3037.

      Oral argument December 4, 2001.

    Decided February 1, 2002.

    2002 WI 11
    (Also reported in 638 N.W.2d 575.)

      For the plaintiffs-appellants there were briefs by Shane W. Falk and Seidl & Stingl, S.C., Wausau, and oral argument by Shane W. Falk.

    For the defendant-respondent there was a brief by Todd Joseph Koback and Terwilliger, Wakeen, Piehler & Conway, S.C., Wausau, and oral argument by Todd Joseph Koback.

   N. PATRICK CROOKS, J.

¶ 1. This case is before the court on certification from the Court of Appeals, District III, pursuant to Wis. Stat. § 809.61 (1999-2000). The parties dispute what damages an insured can pursue in a bad faith action against an insurer. Specifically, we address whether bad faith tort damages include those damages that could also be pursued in a breach of a fire insurance contract cause of action, such as the policy proceeds. We further address whether an insured is barred from pursuing those damages in a bad faith claim when the insured's breach of a fire insurance contract claim is barred by the statute of limitations.

¶ 2. After reviewing the development of the tort of bad faith in Wisconsin, we conclude that the circuit court's order prohibiting the plaintiffs from attempting to collect any damages otherwise recoverable under a breach of contract claim was an erroneous exercise of discretion. Although we agree with the circuit court's conclusion that the tort of bad faith is a separate cause of action from a breach of an insurance contract claim, the absence of a valid breach of contract claim does not prohibit the plaintiffs from pursuing certain damages in a bad faith claim. We specifically rely on language from DeChant v. Monarch Life Insurance Company, 200 Wis. 2d 559, 571, 547 N.W.2d 592 (1996), stating, "when an insurer acts in bad faith by denying benefits, it is liable to the insured in tort for any damages which are the proximate result of that conduct." Accordingly, we conclude that the plaintiffs are entitled to pursue any damages which are the proximate result of the defendant's alleged bad faith, including damages that were otherwise recoverable in a breach of an insurance contract claim.

¶ 3. We further conclude that the circuit court's dismissal of the plaintiffs' breach of a fire insurance contract claim due to the failure to comply with the statute of limitations, does not alter our holding in this case. A bad faith claim is governed by a two-year statute of limitations, rather than the one-year statute of limitations governing a breach of a fire insurance contract claim. While plaintiffs should not be able to recover duplicative damages under both a bad faith tort claim and a breach of contract claim, we do not face that potential here because their breach of an insurance contract claim has been dismissed. Consequently, we conclude that the circuit court erred by concluding that the plaintiffs' ability to pursue damages under their bad faith claim is controlled by the absence of a valid breach of a fire insurance contract claim. They were thus prohibited from attempting to collect damages otherwise recoverable under such a breach of contract claim. Under DeChant, we conclude that the plaintiffs are able to pursue "any damages which are the proximate result" of the defendant's alleged bad faith, if bad faith is established at trial.

f — H

¶ 4. The relevant facts are not in dispute. Since approximately 1985, Thomas and Joan Jones (hereinafter the Joneses) owned a residence and motel located near a lake in Woodruff, Wisconsin. In 1993, the Jone-ses insured the property with Secura Insurance Company (hereinafter Secura). In the process of approving the insurance coverage, a representative from Secura did an inspection of the Joneses' property and graded the risk as "good."

¶ 5. In approximately May 1997, the Joneses presented a notice of loss to Secura for damages to their residence and motel. The Joneses reported that their home appears to be leaning toward the lake, the chimney is separating from the house, and the deck is slanting. On May 21, 1997, Wayne Bognar, a Secura Claims Adjuster, inspected the Joneses' property and denied coverage for their claim. Bognar concluded that the damage was the result of an on-going situation, rather than a collapse, and was not covered by the Joneses' policy.

¶ 6. On March 18, 1999, the Joneses filed this lawsuit against Secura in Vilas County Circuit Court. The Joneses claimed, among other things, breach of the insurance contract and bad faith. On May 17, 2000, the circuit court, the Honorable James B. Mohr, presiding, granted summary judgment in favor of Secura on the breach of contract claim. The circuit court concluded that the breach of contract claim was barred by the one-year statute of limitations pursuant to Wis. Stat. § 631.83(l)(a). At the same time, the circuit court denied Secura's motion for summary judgment on the bad faith claim.

¶ 7. In response to the circuit court's grant of summary judgment on the breach of contract claim, Secura filed a motion for declaratory judgment. Secura requested that the circuit court declare that the Jone-ses' claims for damages, as a result of the lost use of their property, lost property, and lost business, were not recoverable under their bad faith tort claim. Secura argued that the alleged damages are not recoverable under the bad faith tort claim, because they are contract damages properly dismissed with the Joneses' breach of contract claim. The Joneses responded by claiming that Secura is liable for any damages which are the proximate result of Secura's bad faith.

¶ 8. On October 5, 2000, the circuit court held a hearing on Secura's declaratory judgment motion. At the end of the hearing, the circuit court judge granted Secura's motion. The court recognized that this was an issue of first impression in Wisconsin and acknowledged difficulty in making its decision.

I must admit after having read the briefs and several of the cases that the parties cited, the DeChant case, Anderson, Poling, I think Heyden was cited, I was somewhat surprised that this issue specifically apparently has never been addressed.... And I had some difficulty in making my way through the earlier court decisions dealing with the facts of this particular case. However, since I must make a ruling one way or another here, I am satisfied, after reading those cases and, obviously, your briefis], that the courts in the past have essentially noted a basic difference between a breach of contract and a bad faith claim, and they have indicated that the tort of bad faith is a separate, intentional wrong and creates damages, from what I can glean, that are unrelated to contract damages.
... I guess my holding is going to be that in a bad faith action, what is recoverable are damages that would not have been incurred but for the insurer's tortious conduct. And, I am just holding that I accept the argument of defendants in this action. I'm troubled with [the] situation, and it seems to go both ways, the plaintiff talks about the policy concerning insurer, insurance liability, and insurance company talks about, well, we have these statutes of limitations that apply as well. But, it would seem to me, if the court were to now allow plaintiff to recover the same damages the court previously held are not recoverable after having then dismissed the contract action, would really be unpalatable to the court.

On October 19, 2000, the circuit court issued a written order prohibiting the Joneses from attempting to collect any damages which would have been recoverable under their previously dismissed contract claim.

¶ 9. The Joneses appealed the circuit court's non-final order to the Wisconsin Court of Appeals, District III. The court of appeals granted the interlocutory appeal, and subsequently certified the appeal to this court. We granted review of all issues raised on appeal.

II

¶ 10. Since both parties rely largely on a handful of cases, we first use those cases to provide an overview of the development of the bad faith tort claim in Wisconsin. We specifically focus on what damages are recoverable in a bad faith action.

¶ 11. This court first recognized a bad faith claim in Anderson v. Continental Insurance Co., 85 Wis. 2d 675, 686, 271 N.W.2d 368 (1978). We explicitly recognized a bad faith claim sounding in tort, although arising out of a contractual relationship. Id. "By virtue of the relationship between the parties created by the contract, a special duty arises, the breach of which duty is a tort and is unrelated to contract damages." Id. The duty referred to is the special duty of good faith and fair dealing arising out of the contractual relationship. Id. at 686, 689 (citing Restatement (Second) of Contracts § 231 (Tentative Drafts Nos. 1-7, Rev. and Edited, 1973)). This court also made clear that "the tort of bad faith is not for the breach of a contract. It is a separate tort." Id. at 696.

¶ 12. In adopting the tort of bad faith, we relied on the rationale of Gruenberg v. Aetna Insurance Co., 510 P.2d 1032 (Cal. 1973), and this court's decision in Hilker v. Western Automobile Insurance Co., 204 Wis. 1, 231 N.W. 257 (1930), on reargument, 204 Wis. 12, 235 N.W. 413 (1931). Anderson, 85 Wis. 2d at 687. In Hilker, the court found that the insurance company acted in bad faith in settling a claim of a third party against an insured. 204 Wis. at 10. In recognizing that the insurance company's conduct was bad faith, the court acknowledged that an insurer owes a duty to the insured, analogous to that of a fiduciary. Id. at 13. The Hilker court also emphasized that an insurance company's decision on a claim is in good faith, if it is based upon a knowledge of the facts and circumstances upon which liability is predicated. Id. at 15. "The lack of reasonable diligence and the insurer's refusal to determine the nature and extent of the liability evidenced bad faith." Anderson, 85 Wis. 2d at 688 (discussing Hilker).

¶ 13. In Gruenberg, the California Supreme Court concluded that an insurance company has a duty to deal fairly and in good faith with its insured. 510 P.2d at 1037. In Anderson, we expressly adopted the following statement from Gruenberg as the law in Wisconsin:

It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.

85 Wis. 2d at 689 (quoting Gruenberg, 510 P.2d at 1038). In Anderson we also went on to establish what a plaintiff must show in order to prove bad faith. "To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Id. at 691.

¶ 14. In addition to recognizing the tort of bad faith in Anderson, this court addressed what damages are available in a bad faith action. We emphasized that bad faith is an intentional tort and that a bad faith action may "result in not only compensatory damages, but also punitive damages and damages for emotional injury." Id. at 694. Recovery for emotional distress caused by an insurer's bad faith should be only allowed for severe distress, and when substantial other damage is suffered apart from the loss of contract benefits. Id. at 696. Furthermore, for punitive damages to be awarded, there must be a showing of "evil intent" or of a "special ill-will or wanton disregard of duty." Id. at 697.

¶ 15. After Anderson, the court of appeals addressed damages available in a bad faith tort action in Poling v. Wisconsin Physicians Service, 120 Wis. 2d 603, 357 N.W.2d 293 (Ct. App. 1984), and Heyden v. Safeco Title Insurance Co., 175 Wis. 2d 508, 498 N.W.2d 905 (Ct. App. 1993). In Poling, the court of appeals affirmed the jury's finding of bad faith and the jury's award of damages for emotional distress, substantial other damages, and punitive damages. 120 Wis. 2d at 609-11. Similarly, in Heyden, the court of appeals addressed damages available under the tort of bad faith. "[A]n insured may recover compensatory damages sustained as a consequence of the insurance company's tort of'bad faith' and these damages are of a different species than those that may be recovered for breach of the insurance contract." Heyden, 175 Wis. 2d at 520.

¶ 16. In 1987, this court discussed the claim of bad faith in Warmka v. Hartland Cicero Mutual Insurance, 136 Wis. 2d 31, 400 N.W.2d 923 (1987). Although damages were not at issue, Warmka is significant because it clearly established that the tort of bad faith is governed by the two-year statute of limitations in Wis. Stat. § 893.57. Id. at 35. We explicitly rejected the argument that a bad faith claim is governed by the one-year statute of limitations in § 631.83(2)(a), because the one-year statute of limitations applies only to actions "on the policy." Id.

¶ 17. After Warmka, this court again addressed what damages are available in a bad faith tort action in DeChant v. Monarch Life Insurance Co., 200 Wis. 2d 559, 547 N.W.2d 592 (1996). Specifically, we reviewed the jury's award of damages, including attorneys' fees, bond premiums, and "all other" bad faith damages. 200 Wis. 2d at 566. Relying on Anderson, we first reviewed the nature of the tort of first-party bad faith and the damages generally available.

By virtue of the relationship between the parties created by an insurance contract, a special duty arises, the breach of which duty is a tort and is unrelated to contract damages. ... The tort of bad faith "is a separate intentional wrong, which results from a breach of duty imposed as a consequence of the relationship established by contract.". .. When such a breach occurs, the insurer is liable for any damages which are the proximate result of that breach.

Id. at 569-70 (quoting Anderson, 85 Wis. 2d at 687) (emphasis added). We subsequently reiterated the purpose and standard for bad faith damages several times throughout the opinion: "Its primary purpose is to redress all economic harm proximately caused by an insurer's bad faith." Id. at 570 (emphasis added). "We conclude that when an insurer acts in bad faith by denying benefits, it is liable to the insured in tort for any damages which are the proximate result of that conduct." Id. at 571 (emphasis added). "When an insurer acts in bad faith, a plaintiff is allowed to recover for all detriment proximately resulting from the insurer's bad faith." Id. at 572-73 (emphasis added). Applying this "proximately caused" standard, we concluded "that attorney's fees and bond premiums are recoverable by a prevailing party in a first-party bad faith action as part of those compensatory damages resulting from the insurer's bad faith." Id. at 577.

¶ 18. Several subsequent cases have applied DeChant, especially regarding the validity of awarding attorneys' fees as damages in a bad faith action. See Danner v. Auto-Owners Ins., 2001 WI 90, ¶ 79, 245 Wis. 2d 49, 629 N.W.2d 159; Allied Processors, Inc. v. W. Nat'l Mut. Ins. Co., 2001 WI App 129, ¶ 43, 246 Wis. 2d 579, 629 N.W.2d 329 (relying on DeChant to affirm the trial court's ruling that attorney fees are recoverable, and further awarding expert witness fees and attorneys' travel expenses as compensatory damages for bad faith claim); Majorowicz v. Allied Mut. Ins. Co., 212 Wis. 2d 513, 536, 569 N.W.2d 472 (Ct. App. 1997) (applying "proximate result" standard for bad faith damages, including attorneys' fees); see also McEvoy v. Group Health Coop., 213 Wis. 2d 507, 570 N.W.2d 397 (1997) (applying bad faith tort to HMOs and relying on "proximate result" standard for damages).

III

¶ 19. We now turn directly to the issue in this case, whether contract damages, such as policy proceeds, are recoverable in a bad faith tort action, even when the insured's breach of a fire insurance contract claim is barred by the statute of limitations. "In a declaratory judgment action, the granting or denying of relief is a matter within the discretion of the circuit court." See Hull v. State Farm Mut. Auto. Ins. Co., 222 Wis. 2d 627, 635, 586 N.W.2d 863 (1998). We will uphold the circuit court's decision as long as the circuit court's exercise of discretion was not "based on an error of law." Id. at 636 (citation omitted). What damages an insured can recover in a bad faith action is a question of law, which we review independently, benefiting from the circuit court's analysis. See DeChant, 200 Wis. 2d at 568 (whether an insured can recover attorney's fees as damages in a bad faith action is a question of law) (citing Newhouse v. Citizens Security Mut. Ins., 176 Wis. 2d 824, 837, 501 N.W.2d 1 (1993)); Allied Processors, 2001 WI App 129, ¶ 50-("[W]hat damages a prevailing plaintiff in a bad faith claim may recover presents a legal issue.").

¶ 20. The Joneses argue that the circuit court erroneously exercised its discretion in granting Secura's motion for a declaratory judgment. In support of their position, the Joneses argue: (1) the circuit court failed to apply the unambiguous holding in DeChant and subsequent cases holding the insurer liable for all damages proximately caused by the insurer's bad faith; (2) the circuit court confused "claim" with "recovery," because the statute of limitations applies only to claims and does not preclude recovery of damages pursuant to a separate claim; and (3) the circuit court's decision eviscerates the public policy behind the allowance of bad faith claims.

¶ 21. First, according to the Joneses, the circuit court failed to apply the unambiguous holding of DeChant, which holds the insurer liable for "any damages which are the proximate result" of the insurer's bad faith. 200 Wis. 2d at 570. The Joneses contend that their contract damages fall within the holding in DeChant, because those damages are the proximate result of Secura's bad faith. In arguing that the circuit court failed to apply DeChant, the Joneses also contend that the unambiguous language in DeChant overruled any contrary language in Poling and Heyden. Specifically, the Joneses argue that DeChant's holding that "the insurer is liable for any damages which are the proximate result" of bad faith, overrules language indicating that an insured can recover only damages "other than those attributable to the breach of contract," Poling, 120 Wis. 2d at 609, and damages that are "a different species than those that may be recovered for breach of the insurance contract." Heyden, 175 Wis. 2d at 520. Furthermore, according to the Joneses, subsequent cases, including Danner and Allied Processors, rely on the proximate result rationale. See also Crookston v. Fire Ins. Exch., 817 P.2d 789 (Utah 1991) (holding that a bad faith tort claim is not an action on the contract, therefore, since tort of bad faith is not barred by statute of limitations, insureds allowed to recover all damages attributable to the tort). In Danner, this court affirmed an award of actual attorneys' fees for the underlying contract action, and attorneys' fees in the bad faith action, as compensatory damages. 2001 WI 90, ¶¶ 77, 79. Moreover, in Allied Processors, the court of appeals affirmed an award of attorneys' fees and concluded that the trial court erred in not allowing expert witness expenses and attorneys' travel expenses as compensatory damages in the bad faith action. 2001 WI App 129. The Joneses argue that the circuit court erred by not applying the "proximate cause" rationale, and therefore, they should be allowed to pursue all damages in their bad faith claim, including those otherwise recoverable in a breach of an insurance contract action.

¶ 22. The Joneses further argue that allowing an insured to recover contract damages fulfills the purpose of a bad faith claim. In DeChant, this court stated that the "primary purpose [of the tort of bad faith] is to redress all economic harm proximately caused by an insurer's bad faith." 200 Wis. 2d at 570. According to the Joneses, the circuit court's order is an erroneous exercise of discretion, because the court is prohibiting their ability to pursue recovery of all economic harm proximately caused by Secura's bad faith.

¶ 23. Second, the Joneses argue that the circuit court's decision confuses "claim" with "recovery." The Joneses contend that the one-year statute of limitations in Wis. Stat. § 631.83(l)(a) applies only to their breach of ah insurance contract claim, and not all damages that would have been recoverable under that claim. Because their bad faith tort claim is governed by the two-year statute of limitations in § 893.57, and their bad faith action was timely commenced, their inability to bring the breach of contract claim does not preclude the "recovery" of damages pursuant to their separate and distinct bad faith tort claim. The Joneses urge us to follow the reasoning in Taylor v. State Farm Fire and Casualty Co., 981 P.2d 1253 (Okla. 1999), where the Supreme Court of Oklahoma directly addressed this issue. In Taylor, the plaintiffs breach of contract claim was barred by the statute of limitations, but the trial court allowed the jury to award the plaintiff bad faith damages for the loss payable under the policy and for damages "consistent with [the] harm flowing from [the] insurer's bad-faith breach." Id. at 1258. In addition to relying on Taylor, the Joneses analogize to products liability cases where a court's dismissal of a warranty claim based in contract does not limit the injured plaintiffs recovery for property damages and personal injuries in its strict products liability claim. See Austin v. Ford Motor Co., 86 Wis. 2d 628, 644, 273 N.W.2d 233 (1979) (holding that in light of the court's development of products liability, "it is inappropriate to bring an action for breach of warranty where a tort remedy is sought"). Under both Taylor and the products liability analogy, the Joneses argue that the circuit court's order was an erroneous exercise of discretion, because the court confused the idea of "claim" with that of "recovery."

¶ 24. The Joneses' final argument is that upholding the circuit court's order would "eviscerate" the public policy behind allowance of bad faith claims. In their brief, the Joneses contend that upholding the circuit court's decision would effectively create a bifurcated statute of limitations for bad faith claims where homeowner's and property insurance policy damages are governed by a one-year statute of limitations, but all other damages are governed by a two-year statute of limitations. According to the Joneses, this eviscerates the public policy behind bad faith claims — holding insurers accountable for breaching their fiduciary duty to their own insured. Anderson, 85 Wis. 2d at 689. Furthermore, the Joneses argue that this bifurcated statute of limitations is inconsistent with the notion that the tort of bad faith is a separate intentional tort, apart from the breach of contract. See DeChant, 200 Wis. 2d at 569; Anderson, 85 Wis. 2d at 696. Using the one-year statute of limitations for some damages in a bad faith action, fails to acknowledge that the tort of bad faith is an independent claim governed by a two-year statute of limitations. Accordingly, the Joneses contend that the circuit court's decision was an erroneous exercise of discretion, because it fails to follow DeChant and hold Secura liable for "any damages which are the proximate result" of Secura's bad faith. 200 Wis. 2d at 570.

¶ 25. In response to the Joneses' arguments, Se-cura contends that the circuit court's grant of its declaratory judgment motion is within the circuit court's discretion and should be upheld. Specifically, Secura argues (1) under Anderson and DeChant, damages recoverable in a bad faith claim are "unrelated" and "separate" from damages recoverable in a breach of contract claim; (2) this court should not rely on Taylor or the Joneses' analogy to products liability cases; and (3) Wisconsin's public policy regarding bad faith claims is narrow and restrictive.

¶ 26. Secura first argues that the Joneses' interpretation of DeChant is incorrect and that DeChant actually supports the circuit court's order. According to Secura, DeChant holds that the tort of bad faith is a separate intentional wrong, which creates damages "unrelated to contract damages." 200 Wis. 2d at 569. Secura argues that DeChant, relying on Anderson, clarifies the court of appeals decisions in Poling and Heyden by distinguishing between damages arising from the breach of the special duty created by contract and the breach of contract. Id. According to Secura, the circuit court's decision was correct because the Joneses1 contract damages were extinguished when the circuit court granted summary judgment on that claim in favor of Secura. Consequently, the Joneses' were appropriately prohibited from attempting to collect any damages recoverable under the contract claim, because the Joneses' bad faith claim is a separate action with "unrelated" damages.

¶ 27. Second, Secura argues that this court should not find guidance in Taylor or the Joneses' analogy to products liability cases. Secura contends that Taylor is not controlling because it is an Oklahoma case, and furthermore, Taylor is not persuasive, because Oklahoma's bad faith public policies are different than those of Wisconsin. Specifically, Secura argues that Oklahoma is significantly different because, unlike Wisconsin's intentional requirement to prove bad faith, Oklahoma adopted the expansive definition of bad faith, requiring an insured to prove only that the insurer unreasonably interpreted the contract. See Christian v. Am. Home Assurance Co., 577 P.2d 899, 905 (Okla. 1977). Based on this difference, Secura argues that Wisconsin should not look to Oklahoma for guidance regarding the tort of bad faith.

¶ 28. Secura further contends that the Joneses' analogy to products liability cases is misleading. According to Secura, the Joneses' analogy breaks down because courts have not restricted causes of action arising from a breach of contract (a breach of an insurance contract may give rise to both a breach of contract action and a bad faith tort action), but have restricted claims based on allegations concerning a defective product. Secura further argues that the products liability analogy is unpersuasive, because in order to prevail on the bad faith action, an insured usually must prove that he or she is entitled to a directed verdict on the breach of contract claim. See Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 68 (Tex. 1997). Accordingly, defendant argues that the circuit court's decision was correct, because it followed DeChant, concluding that breach of contract and bad faith actions are separate and the damages for each are "unrelated."

¶ 29. Finally, Secura argues that the Joneses' public policy argument is misplaced, because Wisconsin's public policy regarding bad faith is narrow and restrictive. In adopting the tort of bad faith, Wisconsin adopted a narrow version of the claim by making bad faith an intentional tort. See Anderson, 85 Wis. 2d at 693-94. In Anderson, this court explicitly recognized that an insurance company will be found liable only where it has "intentionally denied (or failed to process or pay) a claim without a reasonable basis." Id. at 693. Compared to California's bad faith action in Gruenberg, which requires an insured only to establish that the insurer unreasonably interpreted the insurance contract, 510 P.2d at 1038, Wisconsin's bad faith claim is considerably more narrow. According to Secura, the damages available under the tort of bad faith should be similarly restricted, as contract damages cannot be re-characterized and recovered as tort damages to avoid the effect of the statute of limitations. Secura's final public policy argument is that the circuit court's order is correct in light of a growing nationwide concern that bad faith has been expanded too far. Secura urges this court not to expand bad faith in Wisconsin by allowing insureds to attempt to collect damages otherwise recoverable under a dismissed contract claim. According to Secura, by enacting Wis. Stat. § 631.83(1), the legislature made a policy decision that claims seeking policy benefits for the breach of an insurance contract must be brought within one year of the inception of the loss. The circuit court's order, therefore, was not an erroneous exercise of discretion, because it appropriately distinguished bad faith tort damages as unrelated to contract damages, and prohibited the Joneses from pursuing contract damages in their bad faith tort claim.

¶ 30. We conclude that the circuit court's order was an erroneous exercise of discretion, because it was based on an error of law. See Hull, 222 Wis. 2d at 636. We recognize, however, that the circuit court faced a difficult decision, because this case presents the issue directly for the first time in Wisconsin.

¶ 31. Under Anderson and Warmka, it is clear that breach of contract and the tort of bad faith are two separate claims or causes of action. In Anderson, we recognized the tort of bad faith as a separate and distinct claim, 85 Wis. 2d at 686, and in Warmka we further distinguished the claims by holding that the tort of bad faith is governed by the two-year statute of limitations, rather than the one-year statute of limitations governing breach of fire insurance contract claims. 136 Wis. 2d at 36. However, in Anderson and Warmka it remains unclear, whether damages for the tort of bad faith and breach of an insurance contract must be similarly separate and distinct, or whether damages in a bad faith claim may include damages otherwise available in a breach of insurance contract claim.

¶ 32. The Joneses and Secura both rely heavily on language from DeChant in support of their respective arguments. Secura focuses on language citing Anderson, concluding that the tort of bad faith is "unrelated to contract damages." DeChant, 200 Wis. 2d at 569. In contrast, the Joneses focus on the court's conclusion that "when an insurer acts in bad faith by denying benefits, it is liable to the insured for any damages which are the proximate result of that conduct." Id. at 571. While the language in DeChant seems to support both positions, we conclude that the language Secura relies on is simply a reiteration of this court's holding in Anderson. The DeChant case centered on damages for the tort of bad faith, specifically attorneys' fees and bond premiums. Therefore, in deciding what damages the Joneses are able to pursue in this bad faith case, we rely on the court's conclusion in DeChant that an insurer is "liable to the insured... for any damages which are the proximate result" of the insurer's bad faith. Id.

¶ 33. While we find the language in DeChant controlling, we find it unnecessary to conclude that Poling and Heyden were overruled by DeChant. The language in Poling and Heyden, referring to bad faith damages as not attributable to breach of contract and a different species than contract damages, is similar to language in DeChant that a bad faith claim gives rise to damages "unrelated" to contract damages. 200 Wis. 2d at 569. Because this is the first time we directly address this issue, we now clarify any discrepancy among the cases by holding that an insurer is liable for any damages which are the proximate result of the insurer's bad faith. In order to prevent further confusion or potential misapplication of language in DeChant, Poling, or Heyden, we now withdraw any language from those cases to the contrary.

¶ 34. This court's "proximate result" language from DeChant controls our conclusion in this case. We interpret the language in DeChant, "liable for any damages which are the proximate result" of bad faith, as inclusive of any and all damages caused by the insurer's tort of bad faith. Consequently, "any damages" may include damages that could also be recoverable independently in a breach of insurance contract action. As recognized above, the tort of bad faith and breach of an insurance contract are two separate claims or causes of action, governed by two separate statutes of limitations. As two separate claims, they appropriately lead to recovery of separate, but not necessarily exclusive, damages. It would be inconsistent, therefore, to prohibit pursuit of some bad faith damages because of application of the statute of limitations for a breach of an insurance contract claim.

¶ 35. Furthermore, we recognize that the tort of bad faith can lead to recovery of the same damages as the breach of contract action, if and only if, those damages are the "proximate result" of the insurer's tortious conduct. The "proximate result" standard from DeChant controls the scope of damages available in a bad faith action, regardless of whether damages falling within that scope would be otherwise recoverable in a breach of an insurance contract claim.

¶ 36. The policy behind the tort of bad faith supports this conclusion. In DeChant we recognized that the "primary purpose [of the tort of bad faith] is to redress all economic harm proximately caused by an insurer's bad faith." 200 Wis. 2d at 570. "The underlying rationale of the tort [of bad faith] is that an insurance company should have something more to lose than the contract payment if it intentionally denies a claim it knows it should pay. The contract amount due plus interest is not enough." Arnold E Anderson, Wisconsin Insurance Law § 9.1 (4th ed. 1998). We therefore have not limited the scope of a bad faith claim to recovery of only those damages not otherwise recoverable in a breach of insurance contract action. Accordingly, the "proximate result" standard controls what damages are available, and does not exclude from recovery those damages otherwise available in a breach of an insurance contract claim.

¶ 37. We disagree with Secura's contention that our conclusion expands the doctrine of bad faith in Wisconsin and is inconsistent with Wisconsin's narrow and restrictive version of the tort of bad faith. While we acknowledge that the tort of bad faith in Wisconsin is an intentional tort, we find it unpersuasive that we should therefore restrict what damages a plaintiff can recover in a had faith action. The fact that the tort of bad faith is an intentional tort means that plaintiffs alleging bad faith are subject to the burden of proving intent. See Anderson, 85 Wis. 2d at 693 (insurance company "liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis"). Because of this burden of proving intent, we recognize that often times a bad faith claim may be more difficult to establish than a breach of contract claim. We conclude, therefore, that the intentional nature of the tort of bad faith is not a valid reason to limit damages. If an insured successfully proves that the insurer intentionally denied a claim without a reasonable basis, the insured is entitled to recover all damages which are the proximate result of the insurer's bad faith.

¶ 38. Finally, we turn to the practical impact of the statute of limitations and Secura's argument that allowing the Joneses to pursue contract damages in their bad faith action effectively extends the one-year statute of limitations for breach of a fire insurance contract to two years. The Joneses have filed their bad faith action in a timely fashion, and are entitled to pursue any damages that are the proximate result of Secura's bad faith. If the Joneses' prove their allegations — that but for Secura's bad faith they would not have suffered their claimed damages, and that those damages are the proximate result of Secura's bad faith, the Joneses may recover any such damages. The fact that some of those damages would have otherwise been recoverable in a timely filed breach of insurance contract action makes no difference in this case.

IV

¶ 39. In sum, we have concluded that the circuit court's order limiting damages was an erroneous exercise of discretion because it was based on an error of law. We have examined the case law, starting with Anderson and continuing through DeChant, and have clarified what damages an insured can pursue in a bad faith action. Based on DeChant and the public policy behind the tort of bad faith, we have concluded that in a first-party bad faith action, an insurer is liable to the insured for any damages which are the proximate result of the insurer's bad faith, including damages otherwise recoverable in a breach of an insurance contract action. We have concluded that even though the one-year statute of limitations on the Joneses' contract claim passed before this action was commenced, the Joneses are not barred from pursuing and recovering damages on their bad faith claim, including damages otherwise recoverable in a breach of an insurance contract action. The Joneses are allowed to recover any damages that are the proximate result of Secura's alleged bad faith, if bad faith is established at trial.

By the Court.— The order of the circuit court is reversed and the cause is remanded.

       All references to the Wisconsin Statutes are to the 1999-2000 version unless otherwise noted.

       In their brief, Thomas and Joan Jones allege several facts relating to the merits of their bad faith claim. The merits of their bad faith claim, however, are not before this court, which makes it unnecessary to discuss those facts alleged in their brief.

       We find it unnecessary to lay out the specific language of the insurance policy because the circuit court's grant of summary judgment on the breach of contract claim is not before this court. Furthermore, we do not rely on the policy language in determining what damages the Joneses can pursue under their bad faith claim.

       The grading of risk appears on the Secura Dwelling Survey Report. The grading of risk for the Joneses' property was "Good" out of a scale of Excellent, Good, Fair, and Poor.

       Wisconsin Stat. § 631.83(l)(a) provides in part:
      An action on a fire insurance policy must be commenced within 12 months after the inception of the loss. This rule also applies to riders or endorsements attached to a fire insurance policy covering loss or damage to property or to the use of or income from property from any cause, and to separate windstorm or hail insurance policies.
      The Joneses' insurance policy is a fire insurance policy governed by the statute of limitations in § 631.83. The phrase "fire insurance" includes all types of property indemnity insurance. Borgen v. Economy Preferred Ins. Co., 176 Wis. 2d 498, 502-03, 500 N.W.2d 419 (Ct. App. 1993) (citing Villa Clement, Inc. v. National Union Fire Ins. Co., 120 Wis. 2d 140, 147, 353 N.W.2d 369 (Ct. App. 1984). The Joneses' policy is a fire insurance policy and therefore, any cause of action based on the policy must be commenced within the one-year statute of limitations. Accordingly, all subsequent references to "breach of insurance contract claim" or "breach of insurance contract cause of action" refer to a cause of action on a fire insurance policy governed by the statute of limitations in § 631.83.

       The standard for punitive damages is currently codified in Wis. Stat. § 895.85. Section 895.85(3) states: "The plaintiff may receive punitive damages if evidence is submitted showing that the defendant acted maliciously toward the plaintiff or in an intentional disregard of the rights of the plaintiff." See also Unified Catholic Sch. of Beaver Dam Educ. Ass'n v. Universal Card Services Corp., 34 F. Supp. 2d 714, 718 (E.D. Wis. 1999). Section 895.85 changed the previous standard which allowed punitive damages if the defendant's conduct was "outrageous:" Wis. JI-Civil 1707.1 n.1 (citing Brown v. Maxey, 124 Wis. 2d 426, 369 N.W.2d 677 (1985)).

       The court of appeals also addressed whether expert testimony is required in order to establish a claim of bad faith. Heyden v. Safeco Title Ins. Co., 175 Wis. 2d 508, 522, 498 N.W.2d 905 (Ct. App. 1993). In Weiss v. United Fire & Casualty Co., 197 Wis. 2d 365, 382, 541 N.W.2d 753 (1995), this court overruled Heyden to the extent it was contrary to our decision that "when an insurer's alleged breach of its duty of good faith and fair dealing toward its insured involves facts and circumstances within the common knowledge or ordinary experience of an average juror, an insured need not introduce expert testimony to establish a bad faith claim."

       Wisconsin Stat. § 893.57 provides: "An action to recover damages for libel, slander, assault, battery, invasion of privacy, false imprisonment or other intentional tort to the person shall be commenced within 2 years after the cause of action accrues or he barred."

       The Joneses make clear that they are not seeking a double recovery. A plaintiff should not be allowed to recover damages under a breach of contract theory and then recover the same damages again under a bad faith tort theory. As noted previously, the Joneses' breach of contract claim was dismissed on summary judgment, therefore, there is no potential for a double recovery in this case.

       Specifically, Secura relies on Austin v. Ford Motor Co., 86 Wis. 2d 628, 645-646, 273 N.W.2d 233 (1979), and at pages 26 and 27 in its brief, Secura argues it is "clear that no contract action exists in the product liability setting; rather, only a tort action for strict liability exists."

       Secura also notes that even California, with a broad bad faith policy, prohibits recovery of contract damages in a bad faith action by holding that the tort of bad faith is an action "on the policy" and is governed by the same one-year statute of limitations as a breach of a fire insurance contract claim. See Prieto v. State Farm Fire & Cas. Co., 225 Cal. App. 3d 1188, 1193 (Cal. Ct. App. 1990) (citing Abari v. State Farm Fire & Cas. Co., 205 Cal. App. 3d 530, 536 (Cal. Ct. App. 1988). We decline to address this reasoning any further in light of clear Wisconsin precedent that a bad faith tort action is not an action "on the policy" and is governed by the two-year statute of limitations in Wis. Stat. § 893.57, rather than the one-year statute of limitations in § 631.83(1)(a). Warmka v. Hartland Cicero Mut. Ins. Co., 136 Wis. 2d 31, 35, 400 N.W.2d 923 (1987).

       Secura cites a Texas case and several law review articles to support its position regarding the growing national concern over the expansion of bad faith. See Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 63 (Tex. 1997) (J. Hecht, concurring); Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 Seton Hall L. Rev. 74, 76 (1994); Alan O. Sykes, "Bad Faith" Breach of Contract by First-Party Insurers, 25 J. Legal Stud. 405,443 (1996); Robert H. Jerry, II, The Wrong Side of the Mountain: A Comment on Bad Faith's Unnatural History, 72 Tex. L. Rev. 1317, 1343 (1994).

       We base our decision on controlling Wisconsin case law, but we find several cases from foreign jurisdictions instructive, including Taylor v. State Farm Fire and Casualty Co., 981 P.2d 1253 (Okla. 1999); Crookston v. Fire Insurance Exchange, 817 P.2d 789 (Utah 1991) and Universe Life, 950 S.W.2d at 68. Also, we find it unnecessary to ground our holding on an analogy to products liability case law. We, therefore, do not address the parties' arguments comparing bad faith claims to products liability case law.

       For example, we withdraw language from DeChant v. Monarch Life Insurance Co., 200 Wis. 2d 559, 569, 547 N.W.2d 592 (1996), indicating that bad faith damages are "unrelated to contract damages" and language from Heyden v. Safeco Title Insurance Co., 175 Wis. 2d 508, 520, 498 N.W.2d 905 (Ct. App. 1993), discussing bad faith damages as "of a different species than those that may be recovered for breach of the insurance contract." We also withdraw similar language from Poling v. Wisconsin Physicians Service, 120 Wis. 2d 603, 609, 357 N.W.2d 293 (Ct. App. 1984), stating, "Anderson requires a plaintiff seeking bad faith damages to prove emotional distress and substantial damages other than those attributable to the breach of contract."

       We note, however, that our decision in this case does not rely on, or interpret, the language of the insurance policy. Our holding, therefore, does not contemplate or address the impact of the insurance policy limits.


source: Caselaw Access Project

author: PER CURIAM JON E WILCOX, J.

license: Public Domain

text:
    In the Matter of Disciplinary Proceedings Against Robert J. Hyndman, Attorney at Law: Board of Attorneys Professional Responsibility, n/k/a Office of Lawyer Regulation, Complainant, v. Robert J. Hyndman, Respondent.
    Supreme Court

      No. 88-1616-D.

      Filed January 23, 2002.

    2002 WI 6
    (Also reported in 638 N.W.2d 293.)
   PER CURIAM

¶ 1. Effective June 1, 1989, this court revoked Robert J. Hyndman's license to practice law in this state for professional misconduct consisting of his neglect of legal matters and his dishonesty, deceit or misrepresentation to his clients, commingling of personal and client funds, failure to maintain complete records of client funds in his possession and promptly pay those funds to clients upon request, filing a false certificate concerning his client trust account, misrepresentation of his practice as being a partnership, failure to promptly deliver client papers to successor counsel, and engaging in the practice of law in violation of this court's rules. Disciplinary Proceedings Against Hyndman, 149 Wis. 2d 487, 439 N.W.2d 129 (1989). At the time of that prior disciplinary proceeding, Attorney Hyndman had been charged but not then convicted of criminal acts. In response to Hyndman's objection that this court in the context of the disciplinary case should not consider the then-pending criminal matter, this court agreed that it was unnecessary to address the pending criminal charge because the referee had recommended license revocation as discipline for Hyndman's other acts of professional misconduct and there was no more severe sanction available. This court asserted, however, that it could, in the future if appropriate, consider the criminal matter if Hyndman were to seek reinstatement of his license to practice law. Id. at 495-96.

¶ 2. Following this court's decision revoking his license to practice law, Hyndman was convicted on the criminal charge of solicitation to commit a felony, delivery of cocaine. Hyndman received a 30-month sentence for that conviction. That conviction was affirmed in State v. Hyndman, 170 Wis. 2d 198, 488 N.W.2d 111 (Ct. App. 1992). Hyndman served eight months of that sentence and was released on parole in September 1993.

¶ 3. On February 9, 2000, Hyndman filed a petition seeking reinstatement of his license to practice law. A public hearing on Hyndman's petition for reinstatement was held and the District 2 Professional Responsibility Committee recommended that the petition for reinstatement be granted. The director of OLR agreed that under the totality of the circumstances, Hyndman's license to practice law in this state should be reinstated.

¶ 4. Although we agree with the recommendation from the district professional responsibility committee and the director that Hyndman's license be reinstated, we must note our grave concern about Hyndman's criminal activities and his felony drug conviction, factors that were expressly not considered by this court when we revoked his license to practice law in 1989. In past cases we have examined the gravity of the underlying misconduct by the attorney and denied reinstatement. See Disciplinary Proceedings Against Hersh, 108 Wis. 2d 450, 321 N.W.2d 927 (1982). We see nothing in our prior attorney disciplinary decisions implying that a petitioner for reinstatement enjoys a presumption of rehabilitation upon the expiration of a specified term of suspension — or in this case upon service of sentence imposed for a criminal conviction — where no evidence of intervening or subsequent misconduct is present. Under the former SCR rules, see SCR 22.28(6), as well as the new ones, a petitioner for reinstatement has the burden of demonstrating by clear and convincing evidence that he or she possesses the requisite moral character to practice law in Wisconsin and that resumption of practice will not be detrimental to the integrity and standing of the bar or the administration of justice or be subversive of the public interest. See Disciplinary Proceedings Against Hetzel, 118 Wis. 2d 257, 268, 346 N.W.2d 782 (1984). At the same time, however, we acknowledge that under former SCR 21.03(5), which was in effect at the time of Hyndman's revocation, it was expressly stated that the imposition of discipline for misconduct is not intended as a punishment for wrongdoing; rather, discipline is imposed to protect the public, the courts, and the legal profession. Our review of the record in this matter now leads us to believe that the petitioner has met his burden and that he can now safely be reinstated to the practice of law in this state. We think that Hyndman's reinstatement and resumption of the practice of law will not endanger the public, the courts, or the legal profession.

¶ 5. The report submitted by the District 2 Professional Responsibility Committee contained the following conclusions supporting its recommendation that Hyndman's license to practice law be reinstated:

This Petitioner has waited eleven years to petition for reinstatement of his law license. He has been sober for ten years and will be active in AA the rest of his life. He has maintained steady employment, done laudable volunteer work, established a strong, loving family, reconnected with his family of origin and, generally, paid his debt to society. Although he served time in prison and found it necessary to declare bankruptcy, he has made all restitution and has the promise of a job with his brother if his license is reinstated. The witnesses Petitioner presented at the reinstatement hearing were credible and convincing.... It is the committee's considered opinion that Robert Hyndman has made significant and lasting life-style changes coupled with an intense desire to resume the practice of law.

¶ 6. As noted, the OLR director agrees and recommends that Hyndman's petition for reinstatement be granted.

¶ 7. Other than noting our concern about the gravity of Hyndman's prior criminal activities as discussed above, we deem it necessary to discuss only one additional area of concern addressed by both the district responsibility committee and the OLR director in his report. The question that was raised, and ultimately resolved in Hyndman's favor, focused on whether Hynd-man had been practicing law while under revocation when he represented his employer in replevin actions in small claims court and made appearances at creditors' meetings in federal bankruptcy proceedings where he filed claims on behalf of his employer. Both former and current SCR 22.26(2) proscribe practicing law while under revocation or suspension. The subcommittee of the district responsibility committee which conducted the public hearing on Hyndman's reinstatement petition considered in detail Hyndman's activities on behalf of his employer. One of the members of that committee requested a research memo from an employee of his firm, discussing whether Hyndman's appearances on behalf of his employer in replevin actions in small claims court and at creditors' meetings where Hyndman filed claims on behalf of his employer in bankruptcy proceedings, constituted practicing law within the proscription of the rule. The research memo suggested that Hyndman's activities did, in fact, constitute the practice of law.

¶ 8. The committee, however, rejected that conclusion and instead determined that because the actions Hyndman took on behalf of his employer could be-and frequently were-performed by non-lawyers, his activities fell within the exception in the rule permitting a suspended or revoked attorney to perform `law related work for a commercial employer." Thus, Hyndman had not violated SCR 22.26(2).

¶ 9. We agree. First we note that Wis. Stat. § 799.06 (1999-2000) permits non-lawyers, if an authorized and full-time employee, to appear on behalf of another "person" in small claims actions. In Jadair Inc. v. United States First Ins. Co., 209 Wis. 2d 187, 562 N.W.2d 401 (1997), this court pointed out that this statute, which permits an authorized full-time employee to appear in small claims actions on behalf of an employer, is an exception to the general proscription against practicing law without a license set out in Wis. Stat. § 757.30. The Jadair court noted the fiction in Wis. Stat. § 799.06(2) that in a small claims action, the non-lawyer appearing for his or her employer is considered to be the "party" to the action. Id. at 198 n.10. See also Holz v. Busy Bees Contracting, Inc., 223 Wis. 2d 598, 589 N.W.2d 633 (Ct. App. 1998), where the court of appeals held that a non-lawyer president of a corporation could file a notice of appeal in a small claims action on behalf of the corporation.

¶ 10. The writer of the research memo submitted to the district committee in this case reasoned that although the activities permitted under Wis. Stat. § 799.06(2) may not constitute practicing law under Wis. Stat. § 757.30, that does not mean that those same activities should not be considered "practicing law" within the prohibition of SCR 22.26(2). In other words, the writer of the research memo took the position that even though a non-lawyer may represent his or her employer in a small claims action under Wis. Stat. § 799.06(2) without violating Wis. Stat. § 757.30, if that non-lawyer is a suspended or revoked attorney, those same acts on behalf of his or her employer would violate SCR 22.26(2). The memo-writer's underlying premise was that actions that may be permissible for non-lawyers, are not permissible for suspended or revoked attorneys because the latter were once licensed to practice law and, consequently, must be held to higher standards.

¶ 11. Likewise, the writer of the research memo concluded that Hyndman's activities on behalf of his employer in the bankruptcy proceedings — even though Hyndman did not appear before a judge and even though those same activities were also regularly performed by non-lawyers — constituted appearances before a governmental body in an effort to determine the rights of individuals, something this court in Disciplinary Proceedings Against Eisenberg, 96 Wis. 2d 342, 344, 291 N.W.2d 565 (1980), held constituted the practice of law within the prohibition of SCR 22.26(2). See also, Disciplinary Proceedings Against Kells, 172 Wis. 2d 613, 627, 493 N.W.2d 723 (1993), where this court held that a suspended attorney who had drafted legal documents for his wife in her federal bankruptcy proceedings had been practicing law in violation of SCR 22.26(2). In Kells, this court noted the sophisticated nature of the legal documents that had been prepared, as well as the extent of the suspended lawyer's actions on behalf of his wife and viewed them as exceeding the kind of participation a pro se debtor's spouse would normally be permitted to undertake.

¶ 12. We agree with the district professional responsibility committee's conclusion that Hyndman's activities on behalf of his employer while he was under revocation did not constitute the practice of law within the proscription of SCR 22.26(2). First, Hyndman's acts in both the small claims court as well as in the federal bankruptcy proceedings were acts that could be and, in fact, frequently were performed by non-lawyers. If those acts would not constitute practicing law for a non-lawyer, then those same acts would not constitute practicing law for a person, like Hyndman, whose license to practice law had previously been revoked or suspended.

¶ 13. Furthermore, as noted, the small claims procedure itself specifically permits non-lawyers to do what Hyndman did on behalf of his employer in small claims replevin actions. Wis. Stat. § 799.06(2). Similarly, we conclude that Hyndman's activities on behalf of his employer in the bankruptcy proceedings did not constitute the practice of law because these activities could be and frequently were, performed by non-lawyers. The testimony before the committee at the public hearing established that Hyndman did not hold himself out to be an attorney when performing those acts; rather he took pains to note that he was acting as a layperson. We agree that Hyndman's activities did not constitute practicing law.

¶ 14. Moreover, we observe that Hyndman's activities could be viewed as simply being "law related work for a commercial employer not itself engaged in the practice of law" — an exception recognized within SCR 22.26(2) itself. Hyndman's employer was a commercial enterprise in the business of leasing household items; it was not engaged in the practice of law. We determine that Hyndman's activities on behalf of his employer fell within this exception in SCR 22.26(2).

¶ 15. In sum, although we are greatly troubled by the seriousness of Hyndman's criminal activities leading to his felony conviction and prison sentence, we conclude that he has met his burden of demonstrating by clear, satisfactory, and convincing evidence that he has the moral character to practice law in this state, that his resumption of the practice of law will not be detrimental to the administration of justice or subversive of the public interest, and that he has complied fully with all the terms of the order of revocation and with the requirements of SCR 22.26. We further conclude that Hyndman's activities on behalf of his employer in the 11 years since the revocation of his license, did not constitute the unauthorized practice of law within the proscription of SCR 22.26(2). Accordingly,

¶ 16. IT IS ORDERED the petition for the reinstatement of the license of Robert J. Hyndman to practice law in Wisconsin is granted and his license is reinstated effective the date of this order upon the condition that he comply with the current CLE requirements.

JON E WILCOX, J.

¶ 17. 0dissenting). I am concerned that the timing of this petition for reinstatement — that it arose during the transition between the old and the new lawyer regulation systems— has not allowed us to make an adequate consideration of the facts in this case. Most notably, I think there has been an insufficient inquiry into the circumstances of Hyndman's felony conviction. Without more information, the court's decision to reinstate Hyndman's license to practice law could set an inappropriate precedent for future cases. Under the circumstances of this particular case, I would find it more appropriate to assign the case to a referee for further investigation. For that reason, I dissent.

¶ 18. As the court points out, the timing of this petition was unusual. Per curiam op. at ¶ 3 n.l. The initial public hearing was held before a subcommittee of the District 2 Professional Responsibility Committee ("the Committee") on August 2, 2000. The report of the Committee was received by the Office of Lawyer Regulation (OLR) on October 2, 2000. Changes in the lawyer regulation system had dissolved the Board of Attorneys Professional Responsibility (BAPR) on October 1, 2000. Because there had already been a public hearing, the case was not assigned to a referee, as would have been required under the present rules. See SCR 21.08 (2000). Instead, the case was sent to the OLR, and the director submitted to this court a report, which recommended reinstatement of Hyndman's license. However, because no referee was appointed, I think that some significant factors regarding Hyndman's fitness to practice law have not been adequately considered.

¶ 19. Most serious among these factors is Hyndman's felony conviction for solicitation to commit a felony, delivery of cocaine. The incident that gave rise to the conviction occurred in 1988 while Hyndman was a licensed attorney and involved a conspiracy to purchase approximately $17,000 worth of cocaine through one of his own clients. Hyndman was charged in 1988, but a judgment of conviction was not entered until March 26, 1991. Because the conviction was not yet final at the time of Hyndman's original disciplinary hearing, the charge, rightly, was not considered for the purposes of discipline. However, this court explicitly stated that the conviction could be considered at future disciplinary proceedings or when Hyndman sought reinstatement. Disciplinary Proceedings Against Hyndman, 149 Wis. 2d 487, 495-96, 439, N.W.2d 129 (1989).

¶ 20. Now that Hyndman has applied for reinstatement, it seems that our consideration of his felony conviction has slipped through the cracks. In the OLR Director's report, the only mention made of the conviction is that "Petitioner showed sincere remorse for the totality of his behavior which led to his revocation and the subsequent criminal conviction" and that "Petitioner's . .. criminal behavior prior to his revocation was reprehensible. However Petitioner has demonstrated that he has addressed the problems (primarily alcoholism) that were present in his life at that time. . . ." The court, in my view, gives equally short shrift to the issue. In its opinion, the court notes its "grave concern about Hyndman's criminal activities and his felony drug conviction" and that a petitioner for reinstatement does not enjoy a "presumption of rehabilitation." Per curiam op. at ¶ 4. However, the court says no more about the conviction and goes on to conclude that Hyndman is a suitable candidate for reinstatement.

¶ 21. Nowhere does the court address the concerns raised by Milwaukee County Assistant District Attorney Jack Stoiber in his letter to the Committee. Specifically, Mr. Stoiber noted that because Hyndman's criminal activity involved a client, Hyndman may have violated his duty to avoid conflicts of interest under SCR 20:1.7, violated his duty to refrain from inappropriate business relationships with clients under SCR 20:1.8, and engaged in conduct that reflected poorly on his honesty, trustworthiness and fitness as a lawyer under SCR 20:8.4. I have similar concerns about these potential violations, and I think that a full inquiry into the issues is necessary before we issue a decision on whether or not to reinstate Hyndman's license. Thus, I would find that further investigation of the matters is warranted.

¶ 22. With that said, I recognize that Hyndman has made great strides in his personal life. He has paid all of his restitution, maintained productive employment, reestablished ties with his family and his community, and brought his substance abuse problems under control. When we have dealt with lawyers impaired by substance abuse problems in the past, we have recognized that substance abuse is a treatable problem that, with diligence and help, can be controlled.

¶ 23. My concern with this case, however, goes deeper than mere impairment. The crime that the court glosses over is not a minor one. Such a felony drug conviction would prevent Hyndman from joining the Armed Forces, from becoming a police officer or a sheriffs deputy, from owning a firearm, and even from becoming a notary public. The fact that the crime involved one of Hyndman's own clients adds to the seriousness of the offense. Still, the court holds today that he is fit to practice law and serve as an officer of the court. Without more to justify this court's lack of consideration of Hyndman's felony conviction, I am concerned that the court is setting a troubling precedent. For this reason, I think a further investigation is warranted, and that this petition should be assigned to a referee for careful consideration in accordance with the present rules.

¶ 24. For the foregoing reasons, I respectfully dissent.

¶ 25. I am authorized to state that Justice N. PATRICK CROOKS joins in this dissent.

       Effective October 1, 2000, Wisconsin's attorney disciplinary process underwent a substantial restructuring. Under former SCR 21.11, when a petition for reinstatement was filed, the Board of Attorneys Professional Responsibility was required to conduct an investigation of the moral character of the person and report its findings and recommendations to this court. Under the new attorney disciplinary procedures, the name of the body responsible for investigating and prosecuting cases involving attorney misconduct was changed to the Office of Lawyer Regulation (OLR) and the supreme court rules applicable to the lawyer regulation system, including reinstatement after revocation, were also revised. In this case, because Hyndman's petition for reinstatement was filed before the effective date of the new rules, pursuant to former SCR 22.28(5), this petition for reinstatement was referred to the appropriate professional responsibility committee of the state bar created by former SCR 21.08 for review and report.
      After a public hearing and recommendation from a subcommittee, that professional responsibility committee recommended that the petition be granted and Hyndman's license to practice law be reinstated. That report was filed with the. director of OLR on October 2, 2000. Under the new provisions of SCR 22.30, a hearing on a petition for reinstatement is to be conducted by a referee. Because this case arose under the old rules but the committee's report was filed under the new rules, the director of OLR filed a report and recommendation with this court agreeing with the district professional responsibility committee's recommendation that under the totality of the circumstances, Hyndman's petition for reinstatement should be granted. The Board of Bar Examiners also filed a memorandum supporting that recommendation. All further references to supreme court rules in this opinion will be to those in effect prior to October 1, 2000, unless specifically noted.

       In Disciplinary Proceedings Against Penn, 2002 WI 5, 249 Wis. 2d 667, 638 N.W.2d 287, released today, we recognize that a petitioner seeking reinstatement has the burden at the hearing held before a referee to demonstrate by clear, satisfactory and convincing evidence that the petitioner has the moral character to practice law in Wisconsin and that his or her resumption of the practice of law would not be detrimental to the administration of justice or subversive of the public interest. To that end, we also recognize that the referee conducting the hearing on the petition for reinstatement may consider the petitioner's past, present, and predicted future conduct and may consider any relevant information presented. See SCR 22.31(1) and (5) (effective October 1, 2000).

       SCR 22.26(2) provides:
      (2) An attorney whose license to practice law is suspended or revoked or who is suspended from the practice of law may not engage in this state in the practice of law or in any law work activity customarily done by law students, law clerks, or other paralegal personnel, except that the attorney may engage in law related work in this state for a commercial employer itself not engaged in the practice of law. (Effective October 1, 2000.)

       All subsequent references to the Wisconsin Statutes are to the 1999-2000 version unless otherwise indicated.

       In contrast, Hyndman's activities in small claims court and in the creditors' meetings in the federal bankruptcy proceedings could be, and frequently were, performed by non-lawyers. Furthermore, with respect to the small claims replevin actions, Hyndman's actions on behalf of his employer were specifically excluded from what would otherwise be considered the unauthorized practice of law under Wis. Stat. § 757.30.

       The Board of Bar Examiners recommended that this petition for reinstatement be granted having determined that Hyndman is in compliance with the applicable continuing legal education requirements.

       10 U.S.C. § 504 (1994); Dep't of Defense Directive 1304.26, § E1.2.7.2 (Mar. 4, 1994).

       Wis. Admin. Code § LES 2.01 (1) (c) (Aug. 2001).

       18 U.S.C. § 922(g) (1994 & Supp. 2000); Wis. Stat. § 941.29(1)(a) (1999-2000).

       63 Op. Atty. Gen. Wis. 74, 75 (1974).


author: PER CURIAM DAVID T. PROSSER, J.

text:
    In the Matter of Disciplinary Proceedings Against David V. Penn, Attorney at Law. Office of Lawyer Regulation, f/k/a Board of Attorneys Professional Responsibility, Complainant, v. David V. Penn, Respondent.
    Supreme Court

      No. 95-0536-D.

      Filed January 23, 2002.

    2002 WI 5
    (Also reported in 638 N.W.2d 287.)
   PER CURIAM

¶ 1. We review the recommendation of the referee that David V. Penn's license to practice law, which this court suspended in 1996 following his conviction on six misdemeanor drug offenses, be reinstated upon certain conditions. Both the Office of Lawyer Regulation (OLR) and the Board of Bar Examiners (BBE) join in that recommendation. No appeal has been filed in this matter.

¶ 2. We adopt the referee's findings of fact and conclusions of law and agree with his recommendation that David V Penn's license to practice law be reinstated and that David V Penn pay the costs of this reinstatement proceedings totaling $6803.64; however, we conclude that rather than being given only six months to pay the costs of this matter as recommended by the referee, David V. Penn shall have one year from the date of this order to pay such costs.

¶ 3. In 1996 when this court suspended David V. Penn's license to practice law following his conviction on six misdemeanor drug offenses, this court wrote:

We determine that the recommended two-year license suspension is appropriate discipline to impose for Attorney Penn's professional misconduct. The seriousness of his criminal conduct in using illegal drugs is exacerbated by the fact that it occurred in the context of his official position as district attorney, a position of public trust in the legal system to which the people of his county elected him. His repeated contravention of the criminal law, which was widely known in the community, caused significant and unjustified damage to the public's perception of the integrity of law enforcement personnel throughout the county.

Disciplinary Proceedings Against David V. Penn, 201 Wis. 2d 405, 406, 548 N.W.2d 526 (1996).

¶ 4. On June 14, 2000, David V. Penn filed a petition for reinstatement of his license to practice law. As noted, that petition was referred to a referee pursuant to SCR 22.30. The referee held a public hearing on the reinstatement petition where evidence was presented on behalf of the petitioner as well as OLR; two members of the public also appeared and presented information. Following that hearing the referee found that since his license suspension, David Penn has completed the court-ordered period of probation for the criminal charges, has addressed his drug dependency by undergoing voluntary in-patient treatment and has submitted to random drug testing, and has paid the costs of the disciplinary proceeding leading to his suspension. Furthermore, the referee determined that David Penn has fulfilled all the requirements set forth in SCR 22.26 for an attorney whose license has been suspended and Penn has attended continuing legal education programs and obtained a sufficient number of credits to be in compliance with the BBE requirements.

¶ 5. In addition, the referee noted that Penn has been comprehensively evaluated for alcohol and other drug use issues by a physician and by an AODA expert, both of whom were of the opinion that Penn may safely be recommended to resume the practice of law.

¶ 6. Furthermore, according to the referee, no evidence was presented at the public hearing to cast doubt on David Penn's qualifications to practice law. Consequently, the referee concluded that David V Penn could be safely recommended to be reinstated to the practice of law, a recommendation in which both the BBE and the OLR joined.

¶ 7. We make two observations about questions identified in the referee's report. First the referee questioned the scope of the reinstatement proceeding and whether testimony and evidence presented at the public hearing should be restricted to the elements listed in SCR 22.29(4) required in the reinstatement petition. On the other hand, the referee stated that although it was "fairly obvious" that the hearing on the petition for reinstatement should not amount to a retrial of the original disciplinary case, the referee wondered if the scope of the reinstatement hearing could properly extend to the facts and behavior which were the subject of the disciplinary proceedings and which led to the license suspension in the first place.

¶ 8. We believe that the rules contemplate that the referee conducting a hearing on the petition for reinstatement must engage in a full and unrestricted evaluation of the petitioner's past, present, and predicted future behavior, as well as any other relevant information goin’g to the issue of whether the petitioner has the moral character to practice law in this state and whether his or her resumption of the practice of law would be detrimental to the administration of justice or subversive of the public interest. We point out that SCR 22.29 lists the requirements a petition for reinstatement must show. However, SCR 22.30 dealing with the reinstatement procedure itself, as well as the provisions in SCR 22.31 describing the reinstatement hearing, bolster the conclusion that the reinstatement hearing if necessary can be far-ranging and not limited to addressing the listed petition requirements in SCR 22.29(4). This court has in prior cases when considering whether an attorney's license to practice shall be reinstated, examined the gravity of the underlying misconduct which led to the license suspension or revocation. See Disciplinary Proceedings Against Hersh, 108 Wis. 2d 450, 321 N.W.2d 927 (1982); see also Disciplinary Proceedings Against Hyndman, 2002 WI 6, 249 Wis. 2d 650, 638 N.W.2d 293, decided this date. We believe that the petitioner's activities leading to the suspension of his or her license to practice law may indeed be relevant to the referee's determination of whether that petitioner has demonstrated by clear, satisfactory, and convincing evidence that he or she has the moral character to resume the practice of law in this state and that such resumption would not be detrimental to the administration of justice or subversive to the public interest. See SCR 22.31.

¶ 9. After á review of the record we conclude that the hearing on the reinstatement petition conducted by the referee in this case was sufficient and that, as the referee determined, David Penn has established by clear, satisfactory, and convincing evidence that he has satisfied all the criteria for reinstatement.

¶ 10. Accordingly, we agree with the referee's recommendation that David V. Penn's license to practice law in this state be reinstated.

¶ 11. The second observation made by the referee in his report dealt with the authority to impose costs of the reinstatement proceedings on the petitioner. According to the referee, the current rules contain no specific provision authorizing the imposition of costs associated with the reinstatement proceeding.

¶ 12. We do not share the referee's doubts about the authority to impose costs in a reinstatement proceeding. As the referee observed, SCR 22.29(5) specifically provides that "[a] petition for reinstatement. . . shall be accompanied by an advance deposit in the amount to be set by the supreme court for payment of all or a portion of the costs of the reinstatement proceeding." In this case, David Penn's petition for reinstatement was, in fact, accompanied by the required advance deposit of $200 for costs. This rule, as well as the general provisions set out for disciplinary proceedings in SCR 22.11 through SCR 22.24, supports the referee's conclusion in this case that costs could be imposed against this petitioner in this reinstatement proceeding. Thus, we adopt the referee's recommendation that David Penn be required, as a condition of reinstatement, to pay the costs of these reinstatement proceedings now totaling $6803.64. We determine, however, that rather than being given only six months to pay such costs, that the petitioner may have one year from the date of this opinion within which to pay such costs. Accordingly, we grant Attorney David V Penn's petition to reinstate his license to practice in this state.

¶ 13. IT IS ORDERED that the petition for reinstatement of the license of David V Penn to practice law in Wisconsin is granted, effective the date of this order, upon the condition that he comply with the current CLE requirements.

¶ 14. IT IS FURTHER ORDERED that David V Penn pay the costs of this reinstatement proceeding totaling $6803.64 within one year of the date of this order.

DAVID T. PROSSER, J.

¶ 15. (concurring in part, dissenting in part). I concur in that portion of the court's decision and order reinstating the license to practice law of Attorney David V Penn. I dissent from the court's determination imposing all costs of this reinstatement proceeding ($6803.64) on Attorney Penn. These costs raise disturbing questions and require comment.

¶ 16. Attorney Penn was admitted to the State Bar of Wisconsin in May 1986. He was elected Vilas County District Attorney in November 1986 and reelected in 1988 and 1990. During this period in public office, Penn developed drug and chemical dependency problems resulting in violations of criminal law. In January 1993, after he left office, he was convicted of six misdemeanor drug offenses involving the use of marijuana and cocaine, and he served jail time as a condition of his probation.

¶ 17. In July 1992 Penn voluntarily suspended his practice of law. He was officially suspended from membership in the State Bar of Wisconsin in October 1993 for failure to pay membership dues. He was formally suspended by the court for a period of two years in June 1996. The record shows that Penn has not practiced law for more than nine years.

¶ 18. The record also shows, however, that in recent years Penn has made a serious and sustained effort to meet his obligations, turn his life around, and overcome his past. Two health care professionals recently evaluated Penn and recommended his readmission. The referee, the Office of Lawyer Regulation (OLR), and the Board of Bar Examiners all recommended his readmission. The court has no evidence of opposition to his readmission to the Bar.

¶ 19. Penn was assessed $23,973.29 in costs in connection with the disciplinary proceeding in 1996. He ultimately paid $26,000 to the Board of Attorneys Professional Responsibility (the Board) in an agreed-upon settlement of this obligation. Although Penn did not pay every penny of interest that had accrued prior to the settlement, he did pay the full costs plus more than $2000 in interest. The referee concluded that "Mr. Penn has paid the costs of the disciplinary proceeding." Penn's commitment to pay this heavy financial obligation contributed to a bankruptcy.

¶ 20. In June 2000, more than four years after he was suspended by this court, Penn filed a petition for reinstatement. He submitted his petition under SCR 22.28, the controlling rule for reinstatement at that time. Supreme Court Rule 22.28(5) and (7) then provided:

(5) The administrator shall investigate the eligibility of the petitioner for reinstatement and file a report and recommendation with the board. At least 30 days prior to the hearing on the petition before a professional responsibility committee, the administrator shall publish a notice in a newspaper of general circulation in any county in which the petitioner maintained an office prior to suspension or revocation and in the county of the petitioner's residence during the suspension or revocation and in an official publication of the state bar.
The notice shall contain a brief statement of the nature and date of suspension or revocation, the matters required to be proved for reinstatement and the date on which a hearing on the petition will be held before a professional responsibility committee ...
(7) A petition for reinstatement must be accompanied by an advance deposit in an amount to be set by the board to cover all or part of the costs of the reinstatement proceeding. The board may, in any case in which to do otherwise would result in hardship or injustice, extend the time for payment or waive payment (emphasis added).

¶ 21. When Penn submitted his petition, he made an advance deposit of $200.00.

¶ 22. At the time Penn filed his petition, this court was in the process of considering changes to the rules governing attorney discipline. The new rules did not become effective until October 1, 2000. Nonetheless, the Board declined to act on Penn's petition while the changes were pending.

¶ 23. The new rules eliminate the role of the district professional responsibility committees in reinstatement proceedings. They provide instead that each reinstatement proceeding be assigned to a referee. Seven months after Penn submitted his petition to the Board, the new Office of Lawyer Regulation sent Penn's case to referee John N. Schweitzer. Two weeks or so later, the director of OLR retained Attorney Matthew F. Anich to represent OLR.

¶ 24. Attorney Penn raised questions about these developments. He disputed the authority of OLR to proceed under the new rules rather than the old rules, given that his petition was filed more than three months before the new rules took effect. He particularly disputed the retention of a referee under the new rules and the appointment of private counsel to represent OLR, recognizing that he could be called upon to pay all their expenses. He also disagreed with the scope of private counsel's reinstatement investigation and successfully challenged the choice of a specific expert to conduct a drug and alcohol abuse assessment.

¶ 25. The referee subsequently acknowledged that Penn's case produced "the first public hearing on an attorney's petition for reinstatement under the Supreme Court Rules that went into effect on October 1, 2000," and he wrote an analysis of the various issues raised by Penn for "their bearing on future hearings."

¶ 26. A careful reading of the record shows that Penn raised several legitimate issues about the procedures to be followed and the powers of OLR, all of which worked to increase his costs. He is now asked to pay all costs of this proceeding ($6803.64), including all costs of deciding these new issues.

¶ 27. Admittedly, Penn is not now challenging these costs before this court; but it takes no imagination to understand that he has simply surrendered in order to stop the OLR cost meter from running.

¶ 28. Attorney Penn is being assessed nearly seven times the costs being assessed against Attorney Hyndman in another matter decided today, in large part because the much more serious Hyndman case was handled under the old rules. Disciplinary Matter Against Hyndman, 2002 WI 6, 249 Wis. 2d 650, 638 N.W.2d 293. I think this result is manifestly unfair. No doubt, Attorney Penn should pay reasonable costs. In my view, full costs are not reasonable under the circumstances here and will impose a hardship on an attorney trying to start over. Consequently, on the issue of costs, I dissent.

¶ 29. I am authorized to state that Justice WILLIAM A. BABLITCH joins this concurring/dissenting opinion.

       Effective October 1, 2000, Wisconsin's attorney disciplinary process underwent a substantial restructuring. The name of the body responsible for investigating and prosecuting cases involving attorney misconduct was changed to the Office of Lawyer Regulation (OLR) and the supreme court rules applicable to the lawyer regulation system were also revised. Although the petition for reinstatement in this matter was filed prior to that effective date, the petition for reinstatement was referred to the referee pursuant to the new provisions of SCR 22.30, and a public hearing was held on that reinstatement petition pursuant to SCR 22.31. References in this opinion to the supreme court rules will be to those currently in effect unless specifically noted.

       SCR 22.30 provides: Reinstatement procedure
      (1) The clerk of the supreme court shall select a referee from the panel provided in SCR 21.08, based on availability and geographic proximity to the petitioner's place of residence, and the chief justice shall appoint the referee to conduct a hearing on the petition for reinstatement. In the case of a license suspension, the hearing shall not be held prior to the expiration of the period of suspension.
      (2) The director shall investigate the eligibility of the petitioner for reinstatement and file a response with the referee in support of or in opposition to the petition.
      (3) At least 30 days prior to the hearing, the director shall publish a notice in a newspaper of general circulation in any county in which the petitioner maintained an office for the practice of law prior to suspension or revocation and in the county of the petitioner's residence during the suspension or revocation and in an official publication of the state bar of Wisconsin.
      (4) The notice under sub. (3) shall contain a brief statement of the nature and date of suspension or revocation, the matters required to be proved for reinstatement, and the date, time and location of the hearing on the petition.

       SCR 22.29(4) provides:
      (4) The petition for reinstatement shall show all of the following:
      (a) The petitioner desires to have the petitioner's license reinstated.
      (b) The petitioner has not practiced law during the period of suspension or revocation.
      (c) The petitioner has complied fully with the terms of the order of suspension or revocation and will continue to comply with them until the petitioner's license is reinstated.
      (d) The petitioner has maintained competence and learning in the law by attendance at identified educational activities.
      (e) The petitioner's conduct since the suspension or revocation has been exemplary and above reproach.
      (f) The petitioner has a proper understanding of and attitude toward the standards that are imposed upon members of the bar and will act in conformity with the standards.
      (g) The petitioner can safely be recommended to the legal profession, the courts and the public as a person fit to be consulted by others and to represent them and otherwise act in matters of trust and confidence and in general to aid in the administration of justice as a member of the bar and as an officer of the courts.
      (h) The petitioner has fully complied with the requirements set forth in SCR 22.26.
      (j) The petitioner's proposed use of the license if reinstated.

        (k) A full description of all of the petitioner's business activities during the period of suspension or revocation.
      (m) The petitioner has made restitution to or settled all claims of persons injured or harmed by petitioner's misconduct or, if not, the petitioner's explanation of the failure or inability to do so.

       SCR 22.31 provides: Reinstatement hearing
      (l) The petitioner has the burden of demonstrating by clear, satisfactory and convincing evidence that the petitioner has the moral character to practice law in Wisconsin, that the petitioner's resumption of the practice of law will not be detrimental to the administration of justice or subversive of the public interest, and that the petitioner has complied fully with the terms of the order of suspension or revocation and with the requirements of SCR 22.26.
      (2) The reinstatement hearing shall be public.
      (3) The referee shall appoint a person to act as court reporter to make a verbatim record of the proceeding as provided in SCR 71.01 to 71.03.
      (4) The petitioner and the director or a person designated by the director shall appear at the hearing. The petitioner may be represented by counsel.
      (5) The hearing shall be conducted pursuant to the rules of civil procedure. The rules of evidence shall not apply, and the referee may consider any relevant information presented. Interested persons may present information in support of or in opposition to reinstatement.

       The referee ruled against Penn on the question whether OLR could assign an outside attorney to represent it in a reinstatement proceeding. Nonetheless, the referee wrote: "The language in the new versions of SCR 21.03(h), SCR 21.03(o), SCR 21.04, and SCR 21.05 can be read as not permitting such an assignment, and a rule change to clarify the language to explicitly permit the assignment of outside counsel is highly recommended."
      The new version of SCR 22.24(1) reads: "The supreme court may assess against the respondent all or a portion of the costs of a proceeding in which it imposes discipline and enter a judgment for costs." An amendment to this rule is presently under consideration to "clarify" that costs may be imposed in a reinstatement proceeding. In the Matter of the Petition For Amendments to Supreme Court Rules Relating to the Lawyer Regulation System, Petition 01-12 at pages 26-27.