Background
In 2012, Reger and a co-founder took Dakota Plains Holding Company public. To reduce his ownership below five percent, Reger transferred company shares to his minor children based on advice from in-house counsel and Faegre Drinker Biddle & Reath LLP. However, because Reger maintained control of the transferred shares, he was required to file Form 13D with the SEC, disclosing beneficial ownership exceeding five percent. Reger failed to make this disclosure.
This omission triggered Department of Justice and SEC investigations, resulting in an SEC settlement requiring approximately $8 million in disgorgement. Dakota Plains shareholders also filed a private securities fraud action (Gruber v. Gilbertson, 628 F. Supp. 3d 472 (S.D.N.Y. 2022)). Reger retained Dorsey & Whitney LLP to represent him in all matters. Although Dorsey avoided federal indictment, a jury in the securities fraud case found Reger intentionally defrauded investors. The federal court rejected Reger’s advice-of-counsel defense, holding that in-house counsel was too involved in the underlying conduct to qualify as “disinterested and independent.”
Reger then sued Dorsey for legal malpractice, alleging negligence and breach of fiduciary duty for failing to properly determine the statute of limitations for claims against his prior counsel. Dorsey moved for summary judgment and counterclaimed for unpaid fees ($593,440.59). The district court granted Dorsey’s motion, applying the in pari delicto doctrine to bar Reger’s claims and granting judgment on the fee dispute.
The Court’s Holding
The Minnesota Court of Appeals affirmed, holding that the district court did not abuse its discretion in applying in pari delicto to bar Reger’s malpractice claims. The court established that when facts are undisputed and no weighing of evidence or apportionment of fault is required to apply an equitable doctrine, abuse-of-discretion review—not de novo review—applies to summary judgment dismissals of in pari delicto claims.
The court reasoned that Reger’s own admissions of securities law violations and the jury’s determination that he intentionally defrauded investors barred his claims. Even if Reger’s prior counsel negligently advised him (which Reger failed to establish as intentional wrongdoing), Reger could not recover in malpractice because he himself engaged in the fraudulent scheme. Under in pari delicto, “a party who engages in a fraudulent scheme forfeits all right to protection, either at law or in equity.” The court distinguished this case from Provision Media, Inc. v. Century College, where genuine factual disputes remained, because here all material facts were undisputed.
On the breach-of-contract counterclaim, the court affirmed summary judgment, holding that the parties’ fee agreement was unambiguous. The agreement provided that Dorsey would receive full fees only if it “successfully argue[d] for a damage amount of $14 million or lower.” Dorsey satisfied this condition, as the judgment in the securities fraud case totaled only $234,773.15 in damages. Therefore, Reger owed Dorsey’s full fees.
Key Takeaways
- The in pari delicto doctrine bars legal malpractice claims brought by clients who have themselves engaged in intentional wrongdoing or fraud, even if counsel provided negligent advice.
- On summary judgment, in pari delicto dismissals receive abuse-of-discretion review (not de novo) when facts are undisputed and no apportionment of fault is needed.
- A client’s prior counsel need not have committed intentional wrongdoing to trigger in pari delicto if the client independently engaged in the fraudulent scheme.
- Attorney fee agreements are interpreted under de novo review; unambiguous contract language means summary judgment on fee disputes is appropriate.
Why It Matters
This decision clarifies the application of in pari delicto in legal malpractice cases, particularly where clients face securities fraud liability. It establishes that courts need not engage in detailed fact-finding or fault apportionment to dismiss malpractice claims when the client’s own admissions and prior judicial findings establish participation in fraud. This significantly limits malpractice recovery for clients entangled in their own misconduct, even where counsel’s advice was allegedly deficient.
For practitioners, the decision underscores the interplay between securities fraud liability and subsequent malpractice litigation. When clients have been adjudicated for intentional fraud, the in pari delicto barrier to malpractice recovery is nearly insurmountable absent evidence that counsel itself committed intentional wrongdoing. The court’s approach reduces litigation burden by allowing summary dismissal in straightforward cases while reserving fuller review for situations where genuine disputes about counsel’s scienter or fault apportionment exist.