Eugene J Thomas v. Miller Canfield Paddock & Stone Plc

STATE OF MICHIGAN

COURT OF APPEALS

EUGENE J. THOMAS, WALTER JAMIL a/k/a UNPUBLISHED
WISAM JAMIL a/k/a WALTER THOMAS, SCD October 21, 2014
ENTERPRISES, L.L.C., a/k/a TBI
ENTERPRISES, L.L.C., CBW TECHNOLOGIES,
INC., a/k/a TBI TECHNOLOGIES, INC., CBW
ENTERPRISES, INC., a/k/a TBI FRANCHISING,
INC., AMERICAN EAGLE WARRANTY
CORP., a/k/a TBI WARRANTY, INC., and TIME
SQUARE, INC., a/k/a TBI MARKETING, INC.,

Plaintiffs-Appellees,

v No. 314374
Oakland Circuit Court
MILLER CANFIELD PADDOCK & STONE, LC No. 2010-112215-NM

Defendant-Appellant.

Before: METER, P.J., and K. F. KELLY and M. J. KELLY, JJ.

PER CURIAM.

Defendant appeals by leave granted an order denying its motion in limine to assert a
wrongful conduct defense in plaintiffs’ legal malpractice action. Because the doctrine of
collateral estoppel bars plaintiffs’ claims that arise from their own wrongful conduct, we vacate
the trial court’s order and remand for further proceedings consistent with this opinion.

I. BASIC FACTS AND PROCEDURAL HISTORY

This is a legal malpractice case. The underlying case giving rise to the malpractice
litigation involved an action brought by Computer Business World, L.L.C., against plaintiffs.

Plaintiffs Eugene J. Thomas and Walter Thomas were the owners of plaintiffs American
Eagle Warranty Corporation, Times Square, Inc., CBW Enterprises, Inc., CBW Technologies,
Inc., and SCD Enterprises, L.L.C. (collectively referred to as “CBW”). CBW entered into an
asset purchase agreement with Computer Business World, through which Computer Business
World purchased the assets of CBW. Dr. Parviz (Perry) Daneshgari owned Computer Business
World. The parties to the purchase agreed to a purchase price consisting of $2 million payable at
closing, $700,000 payable by promissory note after closing and the assumption of an outstanding
bank debt of nearly $1.4 million. The purchase agreement allocated various amounts of the
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purchase price to specific categories: working capital, equipment, security deposits and good
will, and they agreed to a post closing adjustment of the working capital. The purchase closed in
July 2006.

In March 2007, Plante & Moran prepared the post closing adjustment of the working
capital and determined that it should be adjusted downward by about $677,500. In around May
2007, Daneshgari discovered that before the parties entered into the purchase agreement, CBW
engaged in a practice of fabricating invoices and advertisements, and he immediately stopped the
practice. By September 2007, the business failed and a creditor brought a lawsuit against
Computer Business World to collect on the outstanding balance of its debt.

Computer Business World commenced an action against plaintiffs, and the matter
proceeded to arbitration. In its decision, the arbitrator specifically concluded:

Prior to the sale of the business of the CBW Entities, the CBW Entities
purchased a significant amount of their computer parts from Advanced Micro
Devices (“AMD”) and Intel Corporation (“Intel”). Both AMD and Intel had a
marketing development fund program (“MDF”) providing eligibility to purchasers
of significant quantities of parts for reimbursement of advertising dollars. In
order to qualify for reimbursement of advertising dollars, the purchasers had to
meet specific requirements in their advertisements. The evidence reflected that
the CBW Entities engaged in a practice of fabricating advertisements and invoices
for the purpose of seeking reimbursement under the Intel or AMD MDF
programs. Walter and Eugene Thomas authorized and approved this practice.
The reimbursements were reported as rebates in the cost of goods sold, rather than
advertising expenses, in the financial statements of the CBW Entities.

***

The evidence reflected that the CBW Entities annually sold in excess of
$2,000,000.00 of computer parts to Viva Computers, which allowed the CBW
Entities to purchase significant quantities of parts from AMD and Intel at
discounted prices. Both Mr. JR Breslin and Mr. Daneshgari testified that AMD
and Intel terminated the favorable pricing program with the CBW Entities, based
on the fact that before the closing, products sold by the CBW Entities and
purchased from AMD and Intel had been traced to products sold in foreign
countries in violation of the policies of AMD and Intel. The loss of favorable
pricing programs adversely affected the profitability of the company and the
ability to participate in advertising rebate programs.

***

. . . The evidence does not support the Thomas’ claims that they disclosed
the practice of fabricating invoices and advertisements to Dr. Daneshgari before
the closing, and I specifically find that Claimants could not have detected this
practice through normal due diligence. In this regard, the evidence was
conflicting as to whether an e-mail was sent to Dr. Daneshgari and Lindsey

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 Stetson of Miller Canfield, who represented the CBW Entities, disclosing the
practice of fabricating invoices and advertisements before the closing. [1]
Nevertheless, even assuming that the e-mail was sent to Dr. Daneshgari before the
closing, the fact of the matter is that even Ms. Stetson did not conclude from
reading the e-mail that the CBW Entities had fabricated invoices and
advertisements. Accordingly, the e-mail itself does not provide sufficient
disclosure of the practice before the closing.

***

I find that [the CBW Entities] had a legal duty to disclose the practice of
fabricating advertisements and invoices for AMD and Intel, as well as the fact that
they were purchasing a high volume of parts from Intel and AMD at discounted
prices and selling them through improper market channels. I also find that [the
CBW Entities] failed to disclose these facts in order to induce reliance by
[Computer Business World], that the non-disclosure was misleading, that
[Computer Business World] acted in reliance on the misimpression created by
[the CBW Entities], and that [Computer Business World was] damaged as a result
of [the CBW Entities’] failure to disclose. In this regard, I find that [the CBW
Entities] inaccurately reported the reimbursements from the MDF programs as
rebates in the cost of goods sold, rather than as advertising expenses, on the
companies’ financial statements.

The arbitrator awarded $2.8 million in damages to Computer Business World.

1
At issue was not an email, but a fax. The fax was from chief financial officer Sam Shabander
to Daneshgari, and was forwarded to Lindsey Stetson:
Perry [Daneshgari],

Please find enclosed the Articles of Incorporation for the separate entity, Times
Square, Inc. The sole purpose of this stand-alone/shell company is to create and
provide advertising, marketing and consulting invoices to Computer Builders
Warehouse, who in turn submits these invoices to vendors for Market
Development Fund (MDF) reimbursements.

As you are aware from your discussion with Gene and Walter [plaintiffs]
yesterday, due to the narrow nature of the Market Development Funds (MDF)
system that was created and set-up by our vendors, these submitted invoices may
not necessarily reflect what is actually advertised. However, this practiced
structure allows CBW to draw 100% of its earned co-op funds from its vendors in
which these funds are then reinvested back into Computer Builders Warehouse
for market development and operations.

Please feel free to contact me if you have any questions.

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 Oakland County Circuit Court Judge Wendy Potts granted Computer Business World’s
motion to confirm the arbitration award on November 12, 2008. This Court affirmed the order
confirming arbitration. Computer Business World, LLC, v Thomas, unpublished opinion per
curiam of the Court of Appeals, issued September 2, 2010 (Docket Nos. 289396, 290366), lv den
488 Mich 1047 (2011).

Plaintiffs Eugene and Walter Thomas filed chapter 11 bankruptcy petitions. Computer
Business World filed an adversary proceeding against them, arguing that plaintiffs’ debts were
nondischargeable due to fraud. The bankruptcy court, relying on the arbitrator’s finding that
plaintiffs’ acted fraudulently, applied the principle of collateral estoppel and concluded that the
debt was nondischargeable. In re Jamil, 409 BR 866, 871 (Bankruptcy Court, ED Mich 2009).

Plaintiffs brought this action against defendant and others2, alleging legal malpractice.
They alleged that during the course of the representation, they told defendant about the AMD
practices, as well as other matters, and that defendant failed to disclose this information to
Computer Business World. Plaintiffs asserted that in the absence of defendant’s “substandard
representation, legal malpractice and breach of the standard of practice,” the $2.8 million
arbitration award would not have been entered against them. They alleged 39 separate breaches
of the standard of practice.

On January 20, 2012, defendant filed a motion for summary disposition, seeking
dismissal of all claims arising from or related to the MDF practices. It relied on collateral
estoppel and the doctrine of in pari delicto. Also, on January 13, 2012, defendant moved in
limine to preclude plaintiffs from introducing evidence to refute any factual issues resolved by
the arbitrator. Defendant parsed the arbitrator’s decision into 11 facts, which it asserted were
established by virtue of the arbitrator’s findings. It argued that pursuant to the doctrine of
collateral estoppel, plaintiffs should not be permitted to relitigate those facts.

On March 27, 2012, the trial court issued an opinion and order, denying defendant’s
motion for summary disposition, but granting defendant’s motion in limine to preclude evidence
refuting factual issues decided in arbitration. The trial court determined that the following facts
had been established:

(1) That Plaintiffs engaged in a practice of fabricating advertisements and
invoices for the purpose of seeking reimbursement under the Intel or AMD MDF
programs;

(2) That Walter and Eugene Thomas authorized and approved this practice;

(3) That Daneshgari could not have detected the practice of fabricating invoices
and advertisements through normal due diligence;

2
The individual defendants were attorneys, some of whom worked for defendant. Plaintiffs
alleged legal malpractice against them as well as defendant. The trial court dismissed plaintiffs’
claims against all other defendants.

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 (4) That Plaintiffs failed to disclose the practice to Daneshgari;

(5) That Plaintiffs failed to disclose the practice of purchasing a high volume of
parts from Intel and AMD at discounted prices and selling them through improper
market channels;

(6) That the nondisclosure was misleading;

(7) That the nondisclosure of selling through improper market channels was
misleading;

(8) That Plaintiffs knew the non-disclosures were misleading;

(9) That Daneshgari acted in reliance upon the non-disclosures; and

(10) That Plaintiff’s inaccurately reported the reimbursements from the MDF
programs as rebates in the cost of goods sold, rather than as advertising expenses
on the companies’ financial statements.

However, the trial court went on to state the issue of defendant’s malpractice was not litigated
and defendant was not entitled to summary disposition:

Even with this ruling as to collateral estoppel, Defendants[‘] request for summary
disposition to dismiss the allegations that Miller Canfield Defendants failed to
disclose the MDF practices . . ., failed to advise Plaintiffs to not sell their
businesses if the MDF created liability . . ., and failed to inquire into, use the
information found in, or follow up on the information disclosed in Plaintiffs’ fax
of June 2, 2006 . . .is unsupported because these allegations were not litigated in
a prior litigation and are the crux of the alleged legal malpractice by Defendants.

In a May 25, 2012 opinion and order, the court also granted defendants’ motion to deem
additional facts—the valuation of Computer Business World—admitted on the basis that they
were litigated in the arbitration.

Trial commenced, but after several days of proceedings, the court granted defendant’s
motion for mistrial due, in significant part, to the confusion regarding application of collateral
estoppel. The parties were essentially granted a “do over” in which they could re-argue previous
motions.

Defendant again moved to deem certain facts established on the basis of collateral
estoppel, arguing that plaintiffs were precluded from introducing evidence that contradicted the
established facts. It argued that the arbitrator’s finding that plaintiffs intentionally defrauded
Daneshgari when they sold the business to him precluded plaintiffs from relitigating the issue.
Defendant further argued that application of collateral estoppel in this case resulted in a dismissal
of plaintiffs’ claims based on the wrongful conduct rule and the principle of in pari delicto.

Plaintiffs opposed the motion. They argued that collateral estoppel had no application in
a legal malpractice action so as to preclude litigation of issues that were decided in a prior

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arbitration proceeding between the former client and a third party. Plaintiffs maintained that
defendant could not satisfy all of the requirements for application of collateral estoppel: (1)
actual litigation of essential facts; (2) full and fair opportunity to litigate the issues in the
previous lawsuit; and (3) mutuality. Plaintiffs claimed that the issues in the case at bar were
different from those in the previous matter and therefore collateral estoppel did not apply.

The court held a hearing on defendant’s motion on November 7, 2012. The trial court
held that collateral estoppel did not apply:

Here, the Court finds that the issues of fact relied upon in the arbitration
dealt with the conduct of the buyer and seller in the underlying asset purchase
agreement and did not deal with the plaintiffs’ attorneys [sic] alleged failure to
disclose the MDF practices and/or failure by the lawyers, Miller Canfield
defendants, to advise plaintiffs not to sell their business, the precise legal
malpractice claims, or issues in this case. As argued by plaintiff, the three issues
at stake in this litigation were neither addressed in the underlying arbitration nor
involved the same parties. Any prior ruling [sic] made by this Court were
palpably wrong and based upon an erroneous reading of the doctrine here
involved.

The court entered an order denying defendant’s motion to have certain facts deemed admitted on
November 29, 2012. This Court denied defendant’s application for leave to appeal on the
collateral estoppel issue. Eugene J Thomas v Miller Canfield Paddock & Stone PLC,
unpublished order of the Court of Appeals, entered January 11, 2013 (Docket No. 313650).

While defendant’s application was pending in this Court, defendant filed a motion in
limine in the trial court, requesting that it be allowed to assert the wrongful conduct rule as a
defense and that the trial court instruct the jury on the rule. Defendant argued that there were
“two distinct frauds.” The first fraud was plaintiffs’ act of defrauding their vendors – AMD – by
submitting fake advertisements and fake invoices. “The narrow factual dispute for the jury to
decide is whether the vendors authorized the scheme.” The second fraud was plaintiffs’ act of
defrauding their buyer – Daneshgari – by failing to disclose the fake invoices, failing to disclose
“gray market” sales, and misrepresenting plaintiffs’ financial records. Because the trial court
previously ruled that collateral estoppel no longer applied, defendant was ready to present the
same evidence as was presented at the arbitration hearing. Defendant argued that the wrongful
conduct rule may be applied under the circumstances of this case and that the jury should have
the opportunity to decide the issue.

In response, plaintiffs argued that the applicability of the wrongful conduct rule was not
an issue to be presented to the jury; it was an issue of law to be determined by the judge.
Plaintiffs further argued that the wrongful conduct rule did not apply because the alleged
prohibited conduct was not a violation of criminal law. In addition, plaintiffs challenged
application of the wrongful conduct rule on the ground that a sufficient causal nexus between
their alleged conduct and their asserted damages did not exist.

The court addressed defendant’s motion at a hearing on January 9, 2013. It explained, in
part:

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 Plaintiffs’ legal malpractice claim against defendants [sic] is that
defendants [sic] failed to disclose the MDF practices to the buyer under the
buy/sell agreement. Defendants [sic] argue . . . that plaintiffs’ conduct was a
proximate cause of their own illegal conduct under MCL 750.218 which makes it
a crime for a person to defraud, cheat, or use false pretenses to obtain from a
person money or the like. Again, [Orzel v Scott Drug Co, 449 Mich 550; 537
NW2d 208 (1995),] states that a sufficient causal nexus must exist between
plaintiffs’ alleged conduct and plaintiffs’ asserted damages.

Here, plaintiffs’ allegation of damages against Miller Canfield is based on
their failure to disclose the MDF practices that plaintiff admitted it incurred.
Important—their being Miller Canfield. Importantly, this Court notes that
plaintiffs’ position in this case is that their vendor, AMD, allowed plaintiffs to
present fake ads and false invoices contrary to defendants’ allegations that
plaintiffs intended to defraud both AMD and [Daneshgari].

This case is about whether Miller Canfield failed to disclose the practices
and plaintiffs’ damages, if any, as a result. Based on the facts alleged, the Court
finds that there is not—not a sufficient causal nexus between plaintiffs’ MDF
practices and the claimed damages in this legal malpractice case to warrant the
defense. The Court also agrees and opines that whereas here [sic], a similar
approach can be taken through comparative fault. The confusion to the jury
would be almost insurmountable particularly where the Court would be—could be
asked to draw parallels to a criminal statute in a civil proceeding. That confusion
could be for example, the burden of proof, actual elements and the like.

On January 11, 2013, the court entered an order denying defendant’s motion in limine
requesting the court to permit it to assert the wrongful conduct defense and to instruct the jury
accordingly. This Court granted defendant’s application for leave to appeal. Eugene J Thomas v
Miller Canfield Paddock & Stone PLC, unpublished order of the Court of Appeals, entered
January 30, 2013 (Docket No. 314374).

II. ANALYSIS

At oral argument, we asked the parties to revisit the issue of collateral estoppel. After
reviewing counsels’ well-written supplemental briefs, we now conclude that collateral estoppel
applies to the facts of this case and that the wrongful conduct rule precludes plaintiffs from
pursuing their malpractice action to the extent their claims touch upon their own misconduct.

The application of collateral estoppel is a legal question, which this Court reviews de
novo. Estes v Titus, 481 Mich 573, 578-579; 751 NW2d 493 (2008).

Under the wrongful conduct rule, a plaintiff’s claim is barred when his claim is based
entirely or partially on his own illegal conduct. Orzel, 449 Mich at 558. The rule also
encompasses the “doctrine of in pari delicto,” which applies to bar a claim between parties
where the parties are equally in the wrong. Id.

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 The rationale that Michigan courts have used to support the wrongful-
conduct rule are rooted in the public policy that courts should not lend their aid to
a plaintiff who founded his cause of action on his own illegal conduct. If courts
chose to regularly give their aid under such circumstances, several unacceptable
consequences would result. First, by making relief potentially available for
wrongdoers, courts in effect would condone and encourage illegal conduct.
Second, some wrongdoers would be able to receive a profit or compensation as a
result of their illegal acts. Third, and related to the two previously mentioned
results, the public would view the legal system as a mockery of justice. Fourth,
and finally, wrongdoers would be able to shift much of the responsibility for their
illegal acts to other parties. As stated by the Court of Appeals, where the plaintiff
has engaged in illegal conduct, it should be the “plaintiff’s own criminal
responsibility which is determinative.” [Id. at 559-560 (internal citations and
footnotes omitted).]

“To implicate the wrongful-conduct rule, the plaintiff’s conduct must be prohibited or
almost entirely prohibited under a penal or criminal statute.” Id. at 561. In addition, “[f]or the
wrongful-conduct rule to apply, a sufficient causal nexus must exist between the plaintiff’s
illegal conduct and the plaintiff’s asserted damages.” Id. at 564. The Orzel Court explained:

“[The plaintiff’s] injury must have been suffered while and as a proximate
result of committing an illegal act. The unlawful act must be at once the source of
both his criminal responsibility and his civil right. The injury must be traceable to
his own breach of the law and such breach must be an integral and essential part
of his case. Where the violation of law is merely a condition and not a
contributing cause of the injury, a recovery may be permitted.” [Id. at 565,
quoting Manning v Bishop of Marquette, 345 Mich 130, 136; 76 NW2d 75
(1956), quoting Meador v Hotel Grover, 9 So 2d 782 (Miss, 1942).]

A plaintiff’s conduct must only be “a” proximate cause of the damages; it need not be “the”
proximate cause. Orzel, 449 Mich at 566-567.

For the wrongful conduct rule to apply in this case, plaintiffs’ conduct—their alleged
fraud with regard to the asset purchase agreement—must be illegal.3 It must be prohibited by a
penal or criminal statute. Defendant asserts that plaintiffs’ conduct with regard to the sale of the
businesses to Daneshgari and Computer Business World constituted false pretenses pursuant to
MCL 750.218. The crime of false pretenses exists where a person, “with the intent to defraud or
cheat makes or uses a false pretense to . . . [o]btain from a person any money . . . .” MCL
750.218(1)(c). The elements of the offense include: (1) a false representation as to an existing

3
The parties improperly focus on plaintiffs’ conduct as it relates to AMD when the proper focus
is on plaintiffs’ conduct as it relates to the asset purchase agreement. Plaintiffs submitted
inaccurate financial statements, which included the false invoices, during the purchase
agreement. Plaintiffs induced Daneshgari and Computer Business World to rely on inaccurate
financial information.

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fact; (2) knowledge that the representation is false; (3) use of the false representation with the
intention to deceive; and (4) detrimental reliance on the false representation. People v Webbs,
263 Mich App 531, 532, n 1; 689 NW2d 163 (2004).

We conclude that plaintiffs are collaterally estopped from arguing that their conduct was
non-fraudulent. Moreover, their fraudulent conduct satisfies the elements of false pretenses.
Plaintiffs submitted false financial statements with knowledge of their falsity and with the intent
to deceive Daneshgari and Computer Business World during the asset purchase agreement.

“Collateral estoppel, or issue preclusion, precludes relitigation of an issue in a
subsequent, different cause of action between the same parties or their privies when the prior
proceeding culminated in a valid final judgment and the issue was actually and necessarily
determined in the prior proceeding.” Ditmore v Michalik, 244 Mich App 569, 577; 625 NW2d
462 (2001). The purpose of the principle is “to ‘relieve parties of the cost and vexation of
multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions,
encourage reliance on adjudication.’” Detroit v Qualls, 434 Mich 340, 357 n 30; 454 NW2d 374
(1990), quoting Allen v McCurry, 449 US 90, 94; 101 S Ct 411; 66 L Ed 2d 308 (1980). The
principle of collateral estoppel “applies to factual determinations made during . . . arbitration
proceedings.” Porter v Royal Oak, 214 Mich App 478, 485; 542 NW2d 905 (1995).

Three elements must be established for application of collateral estoppel: “(1) ‘a question
of fact essential to the judgment must have been actually litigated and determined by a valid and
final judgment’; (2) ‘the same parties must have had a full [and fair] opportunity to litigate the
issue’; and (3) ‘there must be mutuality of estoppel.’” Monat v State Farm Ins Co, 469 Mich
679, 682-684; 677 NW2d 843 (2004), quoting Storey v Meijer, Inc, 431 Mich 368, 373 n 3; 429
NW2d 169 (1988). “[W]here collateral estoppel is being asserted defensively against a party
who has already had a full and fair opportunity to litigate the issue, mutuality is not required.”
Monat, 469 Mich at 680-681.

The first requirement for application of collateral estoppel is that a question of fact
essential to the judgment was actually litigated and determined by a valid and final judgment.
“‘Where a question of fact essential to the judgment is actually litigated and determined by a
valid and final judgment, the determination is conclusive between parties in a subsequent action
on a different cause of action.’” Senior Accountants, Analysis & Appraisers Ass’n v Detroit, 399
Mich 449, 458; 249 NW2d 121 (1976), quoting Restatement Judgments, § 68, p 293. Collateral
estoppel applies only where the ultimate issue in the second proceeding is identical to that
determined in the prior action, Qualls, 434 Mich at 357; Amalgamated Transit Union, Local
1564 v Southeastern Michigan Transportation Authority, 437 Mich 441, 451; 473 NW2d 249
(1991). “The issue[] must be identical, not merely similar.” Board of County Rd Comm’rs v
Schultz, 205 Mich App 371, 376; 521 NW2d 847 (1994). That issue must also be essential to the
final judgment:

“The issue to be concluded must be the same as that involved in the prior
action. In the prior action, the issue must have been raised and litigated, and
actually adjudged. The issue must have been material and relevant to the
disposition of the prior action. The determination made of the issue in the prior

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 action must have been necessary and essential to the resulting judgment.”
[Qualls, 434 Mich at 357, quoting 1B Moore, Federal Practice, ¶ 0.443[1], p 759.]

The “issue” that is the focus of this matter is plaintiffs’ fraud, as found by the arbitrator.
The arbitrator made specific findings that plaintiffs engaged in misrepresentation and fraud and
those findings must be considered established in this case. The arbitrator specifically concluded:

I find that [the CBW Entities] had a legal duty to disclose the practice of
fabricating advertisements and invoices for AMD and Intel, as well as the fact that
they were purchasing a high volume of parts from Intel and AMD at discounted
prices and selling them through improper market channels. I also find that [the
CBW Entities] failed to disclose these facts in order to induce reliance by
[Computer Business World], that the non-disclosure was misleading, that
[Computer Business World] acted in reliance on the misimpression created by
[the CBW Entities], and that [Computer Business World was] damaged as a result
of [the CBW Entities’] failure to disclose. In this regard, I find that [the CBW
Entities] inaccurately reported the reimbursements from the MDF programs as
rebates in the cost of goods sold, rather than as advertising expenses, on the
companies’ financial statements.

The arbitrator also determined the amount of damages and awarded Daneshgari and Computer
Business World $2.8 million. These findings were essential to the arbitrator’s judgment against
plaintiffs in that action.

Oakland County Circuit Court Judge Wendy Potts granted Computer Business World’s
motion to confirm the arbitration award on November 12, 2008, rejecting CBW’s claims that the
arbitrator exceeded his authority in awarding more damages than the purchase agreement
permitted and that its due process rights were violated because relevant evidence from an AMD
representative would have revealed that there was no fraud:

Defendants have raised a multitude of issues. However, the Court finds
every one of those issues was waived by the defendants because they never
objected to these issues during the lengthy arbitration proceeding. Even with
regard to defendants’ claim that the arbitrator exceeded a contractual monetary
cap on damage, . . . the award reflects damages for a claim raised outside the
contractual cap, and the defendants never objected to the plaintiff’s request to
amend its complaint to add a tort claim. Nor, did defendants object to the
arbitrator considering this issue during the proceeding.

Based on defendants’ failure to make any objections during the
proceeding, looking at the face of the award, the Court cannot find any mistakes
of fact or law that the arbitrator exceeded his authority or any conduct by the
arbitrator which would justify vacating the award as provided in MCR 3.602(K).

Thus, after considering the arguments of the parties, the Court finds the
award of the arbitrator should be confirmed and a judgment should be entered
consistent with this award.

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CBW moved for reconsideration, again arguing that the failure of certain witnesses to testify was
the most significant factor that allowed the arbitrator to conclude that the defendants’ advertising
rebates were a fraud on AMD and that the damages award was inappropriate. The trial court
denied CBW’s motion for reconsideration:

Defendants’ arguments concerning the witness testimony of whether
Defendants defrauded AMD in their purchase of the chips goes to the merits of
the case and ask this Court to substitute its judgment for that of the arbitrator,
which this Court is not permitted to do. Gordon Sel-Way, Inc. supra, 438 Mich
497. In the award, the arbitrator made specific factual findings concerning the
AMD reimbursement for advertising dollars transactions based on the evidence
presented at the hearing. Moreover, no evidence has been presented in
Defendants’ motion for reconsideration, through a transcript of the arbitration
hearing, that the arbitrator refused to allow Defendant to present evidence via
specific witness testimony at the arbitration hearing.

This Court affirmed the order confirming arbitration. Computer Business World, LLC, v
Thomas, unpublished opinion per curiam of the Court of Appeals, issued September 2, 2010
(Docket Nos. 289396, 290366). This Court rejected the claim that the arbitrator exceeded his
authority in awarding damages for CBW’s fraud in the inducement claim. “Because the
arbitration defendants’ fraud in the inducement assertion presents an impermissible invitation to
scrutinize the merits of the arbitration award, we decline to consider any purported error by the
arbitrator in this regard.” Id. at slip op, p 6. Importantly, this Court also rejected the claim that
the arbitrator should have postponed the hearing in order to allow CBW to subpoena AMD
account representative “Mr. Stein” who would have testified that the practice of fabricating
invoices was authorized by AMD. CBW had argued that Stein’s testimony would have
established that they acted in good faith. This Court concluded otherwise:

The arbitrator concluded that the arbitration defendants [CBW] had a legal duty to
disclose their practice of fabricating advertisements and invoices relating to AMD
and Intel, a practice that [Computer Business World] could not otherwise have
detected. The arbitrator also found that the arbitration defendants did not disclose
this practice “in order to induce reliance by [Computer Business World], [and]
that the non-disclosure was misleading.” In light of the arbitrator’s findings and
logic, it appears highly unlikely that he would have deemed integral or even
relevant to his analysis whether an AMD representative had authorized the
invoice fabrication practice. At a minimum, especially given the arbitration
defendants’ neglect to substantiate in any respect any purported information to
which Stein could have testified, the record before us offers only speculation to
bolster the arbitration defendants’ averments that “the arbitrator refused to
postpone the hearing on a showing of sufficient cause, [or] refused to hear
evidence material to the controversy.” And as a general rule, courts will not
vacate an arbitrator’s award on the basis of speculative concerns. [Id. at slip op,
pp 8-9.]

The matter was visited again in plaintiffs’ Chapter 11 bankruptcy petitions. In re Jamil,
409 BR 866, 871 (Bankruptcy Court, ED Mich 2009). The bankruptcy court looked to the

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arbitrator’s decision and found all the elements necessary to establish non-dischargeability for
reasons of fraud. It concluded that the debts to Computer Business World (the arbitration award)
were nondischargeable.

In order to except a debt from discharge under § 523(a)(2)(A), a creditor
must prove the following elements: (1) the debtor obtained money through a
material misrepresentation that, at the time, the debtor knew was false or made
with gross recklessness as to its truth; (2) the debtor intended to deceive the
creditor; (3) the creditor justifiably relied on the false representation; and (4) its
reliance was the proximate cause of loss . . .

In the arbitration proceeding, [Computer Business World] alleged fraud in
the inducement and breach of contract against the defendants. “Fraud in the
inducement occurs where a party materially misrepresents future conduct under
circumstances in which the assertions may reasonably be expected to be relied
upon and are relied upon.” . . . Following 13 days of hearings, the arbitrator
issued his opinion in which he . . . determined all of the necessary elements under
§ 523(a)(2)(A). Accordingly, the Court concludes that the debt of each debtor to
the plaintiff is nondischargeable under § 523(a)(2)(A). [Id. at 872.]

In the instant action, plaintiffs claim that defendant committed legal malpractice through
defendant’s representation of plaintiffs during the asset purchase agreement, which resulted in
the unfavorable arbitration award. “To state a claim for legal malpractice, a plaintiff must allege
(1) the existence of an attorney-client relationship, (2) negligence in the legal representation of
the plaintiff, (3) that the negligence was the proximate cause of an injury, and (4) the fact and the
extent of the injury alleged.” Kloian v Schwartz, 272 Mich App 232, 240; 725 NW2d 671
(2006). To establish proximate cause, plaintiffs must show that defendant’s alleged failures were
a cause in fact of plaintiff’s injury. Manzo v Petrella, 261 Mich App 705, 712; 683 NW2d 699
(2004). This will require a showing that in the absence of defendant’s alleged malpractice
plaintiffs would have successfully defended the claims raised in arbitration. Id.

In support of their claim, plaintiffs allege in part that they revealed the MDF practices to
defendant and that defendant did not disclose those practices or other irregularities to Computer
Business World/Daneshgari. To prevail on their legal malpractice claim, plaintiffs must
demonstrate that defendant had knowledge of the MDF practices and other irregularities and that
if it had disclosed those facts to Computer Business World/Daneshgari, Computer Business
World/Daneshgari would not have prevailed in the underlying arbitration.

The arbitrator’s findings of fact must be considered established in this action because the
issue of plaintiffs’ fraud during the asset purchase agreement was actually litigated and
determined by a valid and final judgment and was essential to that judgment. The basis of the
claims asserted by Computer Business World and Daneshgari was plaintiffs’
misrepresentation/fraud. The findings in that regard were actually litigated at arbitration and
determined by the arbitrator. Those facts are relevant to determining whether defendant’s
alleged malpractice was the proximate cause of plaintiffs’ injury, which is the $2.8 million
arbitration award against it. To the extent that plaintiffs’ fraudulent conduct is an issue that must
be resolved in the case at bar, relitigation of that issue is barred.

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 In support of their position that collateral estoppel does not apply, plaintiffs rely on
Computer Business World, LLC v Simen, unpublished opinion per curiam of the Court of
Appeals, issued March 13, 2012 (Docket No. 301082). Computer Business World involved
Computer Business World and Daneshgari’s legal malpractice claim against the attorneys who
represented them during the asset purchase agreement transaction. This Court explained:

The arbitrator issued an opinion and award on August 4, 2008. The
arbitrator found that prior to the purchase, the sellers had engaged in a scheme to
fabricate advertisements and invoices in order to obtain advertisement
reimbursement, which they then reported as rebates in the costs of goods sold.
The arbitrator further concluded that plaintiffs became aware of the fabrication of
invoices and advertisements nine months after the purchase, and that plaintiffs
“could not have detected this practice through normal due diligence.” The
arbitrator also found that the sellers had a legal duty to “disclose the practice of
fabricating advertisements and invoices” and the sellers’ purchase of “a high
volume of parts from Intel and AMD at discounted prices and selling them
through improper market channels.” Moreover, the arbitrator found that two
representatives of the sellers breached the contract when they walked out of a
meeting concerning the company’s working capital, threatened to bankrupt the
company, and refused to work for the company for the agreed upon year after the
sale.

Nevertheless, the arbitrator concluded that plaintiffs were “not entitled to
rescission of the [asset purchase agreement] because they did not make a
seasonable assertion of their rescission right.” However, because of the
fraudulent concealment and breach of contract by the sellers, the arbitrator
awarded plaintiffs damages of $2,800,000, plus interest. The circuit court
confirmed the arbitration decision. It was plaintiffs’ [Computer Business World
and Daneshgari] belief that they “would have had a higher arbitration award [but
Simen] missed the deadline for breach of contract suit.” [Id. at slip op at 2-3.]

The plaintiffs (Computer Business World/Daneshgari) alleged that the attorneys failed to (1)
properly perform due diligence; (2) detect, warn or explain the implications of the CBW’s failure
to properly trademark their name and logo; (3) advise them that due diligence should be
conducted regarding trademark issues; (4) negotiate their debt; (5) seek an extension of a lease;
and (6) seek rescission and engaged in other acts of malpractice. Id., slip op at 4.

The defendants in Computer Business World (attorney Sander Simen and his law firm)
moved for summary disposition on collateral estoppel grounds. In rejecting the application of
collateral estoppel in that case, this Court explained:

[T]he issues addressed in the arbitration are plaintiffs’ [Computer Business World
and Daneshgari] claims relating to the misrepresentations and fraudulent conduct
of the sellers, not the conduct of Simen and his firm or their legal representation
of plaintiffs in those transactions. Nowhere in the arbitrator’s opinion is there any
reference to intellectual property, intellectual property due diligence, or whether
defendants bore any legal responsibility for the failure to perform intellectual

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 property due diligence. The only mention of the term “due diligence” is a
statement that plaintiffs [Computer Business World and Daneshgari] could not
have discovered the fabrication of invoices and advertisements through due
diligence, and plaintiffs [Computer Business World and Daneshgari] are not
asserting any claim relating to the fabrication of invoices and advertisements in
this lawsuit. Thus, the issue of defendants’ [the attorneys] responsibility for
intellectual property due diligence was not actually litigated and was not subject
to any final judgment.

With regard to plaintiffs’ [Computer Business World and Daneshgari]
claim of legal malpractice relating to the Madison Heights lease, there is likewise
no mention in the arbitration opinion of the lease or of the events surrounding
plaintiffs’ eviction. Thus, collateral estoppel does not bar this claim, because the
issue has not been actually litigated and has not been subject to a final judgment.
As for rescission, the arbitrator did state that rescission of the contract was not
seasonably sought. However, the arbitrator made no findings of fact relating to
why rescission was not sought, at what point rescission should have been sought,
or the role defendants [the attorneys] played in failing to seek rescission.
Moreover, as plaintiffs [Computer Business World and Daneshgari] acknowledge,
even if collateral estoppel did apply, this would not justify granting defendants’
[the attorneys] motion for summary disposition because a finding that rescission
was not seasonably sought actually bolsters plaintiffs’ [Computer Business World
and Daneshgari] claim that defendants [the attorneys] committed legal
malpractice. [Id., slip op at 6.]

Computer Business World is easily distinguishable from the case at bar. Although the
arbitrator did not address the issues that form the basis of plaintiffs’ claim of legal malpractice in
this action (i.e., defendant’s representation leading up to the asset purchase agreement), the
arbitrator did address the key issue of plaintiffs’ fraud. Plaintiffs’ fraud and misrepresentation
are issues that must be determined in order to resolve plaintiffs’ legal malpractice action because,
under the wrongful conduct rule, plaintiffs are precluded from asserting a claim against
defendant for their own misconduct. The trial court erred in denying defendant’s request that it
deem the facts as determined by the arbitrator as established for purposes of this action.4

4
We reject plaintiffs’ attempt to reference an affidavit authored by their former attorney, Sander
Simen. Plaintiffs sued Daneshgari, Computer Business World and others in federal district court,
alleging, inter alia, claims under the Racketeer Influenced and Corrupt Organizations Act and the
Fair Debt Collection Practices Act. Thomas v Daneshgari, 997 F Supp 2d 754 (ED Mich 2014).
They argued that Daneshgari perjured himself during the arbitration proceeding and, therefore,
fraudulently procured a judgment against them. In the affidavit, Simen avers that he was present
when plaintiffs advised Daneshgari of the invoice practice. The district court dismissed
plaintiffs’ federal claims as without merit and declined to exercise supplemental jurisdiction over
plaintiffs’ remaining state claims. The district court noted:

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 Plaintiffs argue that, even if certain facts are deemed established, the wrongful conduct
rule does not apply because there is no causal nexus between a plaintiffs’ wrongful conduct and
their claim for damages.

As noted by defendant, there is support for applying the wrongful conduct rule in the
context of a legal malpractice action. In Pantely v Garris & Garris, PC, 180 Mich App 768; 447
NW2d 864 (1989), which predated Orzel, this Court applied the doctrine of in pari delicto to bar
the plaintiff’s legal malpractice claim against the attorneys and law firm that represented her in
her divorce proceedings. The plaintiff, on advice from her attorneys, perjured herself, claiming
that she had lived in Livingston County for at least 10 days before filing her complaint. She
obtained a divorce judgment, which was later set aside for lack of jurisdiction. The plaintiff then
filed a legal malpractice action against her attorneys, alleging that they were negligent by filing
the action in Livingston County, alleging that she was a resident of Livingston County, and
advising her to testify falsely that she lived in Livingston County. Id. at 770-771.

The defendants moved for summary disposition, asserting that the plaintiff was in pari
delicto with them and may not profit from her unsuccessful fraud. Id. at 772. The plaintiff
argued against application of the doctrine of in pari delicto, asserting that she lied at her
attorneys’ direction and was emotionally distraught and desperate to obtain the divorce. She
asserted that “she acted ‘under circumstances of oppression, imposition, hardship, undue
influence, or great inequality of condition’” and that her misconduct was not as reprehensible as
that of the defendants. Id. at 775-776. The Court found the doctrine applicable. It held that
because “all of the losses claimed resulted from the Supreme Court’s decision to set aside the
Livingston County judgment and since that decision was premised solely upon [the plaintiff’s]
perjury, that perjury bars all claims against [the] defendants . . . .” Id. at 778. This Court wrote:

We can readily envision legal matters so complex and ethical dilemmas so
profound that a client could follow an attorney’s advice, do wrong and still
maintain suit on the basis of not being equally at fault. But perjury is not
complex; and telling the truth poses no dilemma. Even against the backdrop of a
moral relativism that passes for intellectual sophistication in contemporary
America, perjury is wrong. More pointedly, it is a crime. MCL 750.422; MSA
28.664. A law degree does not add to one’s awareness that perjury is immoral
Plaintiffs could theoretically return to state court and move to amend the state
court judgment, or request relief from the judgment. The Michigan Court Rules
authorize the state court to grant a new trial based upon “irregularity in the
proceedings” or “misconduct ... of the prevailing party.” MCR 2.611(A)(1)(a),
(b). The Michigan Court Rules authorize “relief from judgment” based on
“[n]ewly discovered evidence” or “[f]raud (intrinsic or extrinsic),
misrepresentation, or other misconduct of an adverse party.” MCR
2.612(C)(1)(a), (c). Plaintiff's counsel conceded at the hearing that this kind of
relief was available. [Thomas, 997 F Supp 2d at 761, n 4.]

Similarly, we conclude that the arbitration award (and prior judgments arising therefrom)
continue to be valid absent an order setting it aside.

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 and illegal, any more than an accounting degree adds to one’s awareness that tax
fraud is immoral and illegal. We agree with the views expressed by the
Wisconsin Supreme Court in Evans [v Cameron, 360 NW2d 25, 28-29 (Wis,
1985)]:

“There may be circumstances in which the advice given by an
attorney is so complex that the client would be unaware of the
wrongfulness involved in following that advice. In such circumstances,
more weight may be given to the influence an attorney will have over the
client and the amount of reliance which the client can justifiably place in
the attorney. The wrongfulness of lying while under oath, however, is
apparent. Absent some allegation of special circumstances constituting an
exception to the rule of in pari delicto independent of the attorney-client
relationship, the client’s deliberate act of lying under oath places that
client in pari delicto with the attorney who advised that client to lie.”

[Pantely, supra 180 Mich App at 776.]

The Court agreed that the attorneys’ misconduct harmed the profession, the courts and the
public. However, it noted that there exist means to account for those harms: discipline or
disbarment; contempt proceedings; and criminal prosecution. Id. It commented, “To argue that
an equal partner in the alleged perjury can clothe herself in the vicarious virtue of the public
interest and recover damages caused by her own perjury is to willingly suspend disbelief.” Id. at
777-778.

Plaintiffs brought this malpractice claim against defendant, alleging that defendant failed
to disclose their MDF practices to Daneshgari and that as a result of that failure, they were held
liable to Daneshgari and Computer Business World for a $2.8 million judgment. Plaintiffs can
only establish their malpractice claim against defendant by relying on their own misconduct.
The arbitration award against plaintiffs was based on their fraud, and this legal malpractice claim
is premised on the fact that they were held liable for fraud. Therefore, a sufficient causal nexus
exists between plaintiffs’ fraudulent activity and the damages they claim in this action.

In conclusion, the doctrine of collateral estoppel bars plaintiff’s claims against defendant
to the extent those claims arise from their own wrongful conduct. Plaintiffs brought this legal
malpractice action against defendant, arguing that defendant was negligent either because it
knew about the false invoices and failed to include the information in the closing documents or
because it did not know about the false invoices and failed to exercise due diligence in
uncovering the practice and advising plaintiffs accordingly. Applying the doctrine of collateral
estoppel, plaintiffs’ conduct has been found fraudulent and the wrongful conduct rule precludes
their recovery. Because plaintiffs have admitted to fabricating false invoices and their conduct in
the asset purchase sale was found fraudulent by the arbitrator, there are no issues of fact

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remaining. As a matter of law, plaintiffs cannot proceed on any of their malpractice claims that
touch upon their own misconduct.5

We vacate the trial court’s order denying defendant’s motion in limine to assert a
wrongful conduct defense and remand for further proceedings to determine what, if any, of
plaintiff’s claims remain. We do not retain jurisdiction.

/s/ Patrick M. Meter
/s/ Kirsten Frank Kelly
/s/ Michael J. Kelly

5
Having found that collateral estoppel and the wrongful conduct rule apply, we need not address
defendant’s claim that the wrongful conduct rule is a matter of fact for the jury to decide. Nor
need we determine whether comparative fault would adequately protect defendant in a manner
similar to the wrongful conduct rule. Nor need we consider whether the wrongful conduct rule
was unnecessarily confusing for a jury.

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