Wisconsin Business and Commercial Litigation

Otherwise known as frustration of purpose, discharge by supervening frustration is a policy that excuses contractual non-performance, such as in Ryan v. Estate of Sheppard, a recent District II court of appeals case arising in Washington County.  There, Sheppard c0ntracted with Ryan to provide personal flight instruction and pilot in command services for Sheppard.  Unfortunately, Sheppard died before any payment or services could be rendered, and Ryan sued his estate, seeking to recover the payments agreed to in the contract.

The Estate argued that the contract was for personal services, and non-performance was excused by frustration:

The doctrine of frustration of purpose, referred to generally as “frustration,” or as “discharge by supervening frustration” by the Restatement, is as follows:

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

RESTATEMENT (SECOND) OF CONTRACTS § 265. See also WIS JI–CIVIL 3070.

The court of appeals agreed.

We agree with the circuit court’s conclusion that the purpose of the agreement has been frustrated, discharging the Estate of its applicable duties. While Sheppard’s promise in the agreement was only to pay, his purpose in making the contract is clear: to obtain personal flight instruction and pilot services, as evidenced by Ryan’s obligations. In a personal service contract such as this one, a basic assumption is that both parties will be alive. See RESTATEMENT (SECOND) OF CONTRACTS §§ 262, 265 cmt. a.  Sheppard’s death, then, frustrated the contract’s purpose–it made personal flight instruction unfeasible. When there is nothing an obligor can do to fulfill his or her contractual duties, the obligee’s duty to compensate is excused. See Wm. Beaudoin, 63 Wis. 2d at 448-49. The Estate’s duty to render payment is thus discharged under frustration of purpose.

Ryanair photo courtesy aromano’s flickr gallery via this license.

In Miller v. Hanover Ins. Co., the Wisconsin Supreme Court undertook a careful analysis of the law surrounding the re-opening of default judgments, particularly the five interest of justice factors under Wis. Stat. s. 806.07(1)(h).  Notably, the court determined that no finding of excusable neglect is required under (1)(h) to re-open a default judgment:

We conclude that M.L.B., and subsequent cases, unambiguously establish that a circuit court is to consider the five interest of justice factors in determining whether extraordinary circumstances are present under Wis. Stat. § 806.07(1)(h) such that relief from a judgment, including a default judgment, is appropriate. M.L.B., 122 Wis. 2d at 552­53; see Connor, 243 Wis. 2d 279, ¶41 (applying the five interest of justice factors to determine whether the circuit court properly exercised its discretion in denying relief from default judgment under para. (1)(h)); Johns v. Cnty. of Oneida, 201 Wis. 2d 600, 607­08, 549 N.W.2d 269 (Ct. App. 1996) (same). A finding of excusable neglect is not required under the extraordinary circumstances test to obtain relief from a default judgment under para. (1)(h). See generally M.L.B., 122 Wis. 2d 536.

The court went on to apply each of the five factors to the facts in the case, which will, of course, be of use to those of us who find ourselves behind a default judgment 8 ball.  There is a spirited concurrence from Justice Bradley, who reaches the same result for drastically different reasons, concentrating on the “extraordinary circumstances” phrase, arguing that the majority’s approach is too formulaic.

Upside down house courtesy Sideshow Bruce’s flickr gallery via this license.

In Turner v. Sanoski, the Wisconsin Court of Appeals addressed the statute of limitations for a malicious prosecution claim arising in Douglas County.  For those of you who hate to wade through text to get to the answer, I’ll cut to the chase:

because malicious prosecution is an intentional tort to the person, the WIS. STAT. § 893.57 two-year statute of limitations applies

Seems to make sense, given the statute’’s language that says it applies to “other intentional tort to the person.”  What’s surprising is that this is the first published decision on this topic in almost 30 years.

Congrats to my colleagues Tom Schrimpf and Melissa Lauritch, who wrote the amicus curae brief on behalf of the Wisconsin Insurance Alliance in Roehl Transport v. Liberty Mutual Ins. Co., a recently published Wisconsin Supreme Court decision on insurance bad faith.  Tom got in on another one, too:  Johnson Controls v. London Market, a duty to defend case where he wrote the amicus curae brief on behalf of the Complex Insurance Claims Litigation Association, American Insurance Association, and Wisconsin Insurance Alliance.  As you might have guessed, Tom Schrimpf is one of Wisconsin’s premier insurance attorneys, and deservedly so.

Ehlinger v. Hauser is a long one.  It’s about a dispute between two joint and equal shareholders in a moulding company.  First, I’ll ask the obvious question:  doesn’t anyone ever learn that equal partnerships, including equal shareholders, just doesn’t work?  Second, this going in halvsies on businesses is only good for us lawyers.  If any non-lawyers are reading this, and you remember only one thing, remember that you never want to be in a stand-off with your business partner who owns the exact same amount of the business that you do.

Okay, now on to the case itself.  The language of the shareholder agreement was at issue — if you’re going to be joint and equal, you better have a VERY tightly drafted agreement.  This case proves it.  Here’s the holding in a nutshell, because the full version will take a while:

Hauser contends that both the circuit court and court of appeals incorrectly concluded that the buyout agreement is unenforceable. First, he asserts that the circuit court erred when it determined that the undefined term “book value” rendered the buyout agreement unenforceable. Second, Hauser argues that the court of appeals incorrectly determined that supporting documentation is a necessary component of a computation under generally accepted accounting practices (“GAAP”). Third, he asserts that the circuit court erroneously exercised its discretion when it denied him further opportunity to challenge and counter the special magistrate’s conclusions. He argues that the meaning of “book value” is ambiguous and that he is entitled to a trial to determine the intent of the parties.

We conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald’s books to determine whether they accurately reflect the corporation’s assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald’s records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.

Additionally, to the extent that Hauser’s characterization of the court of appeals’ decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAP, but what is required to determine the parties’ rights.

Finally, we conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.

In his cross-petition, Ehlinger argues that the circuit court erroneously permitted the defendants’ litigation expenses to be paid by the corporation. This decision would not be erroneous if Hauser was entitled to indemnification or if Evald spent its assets in its own defense. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855 (2007-08).  Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense. Therefore, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser’s litigation expenses.

This case is a lesson that what seems right or just is not always what’s legal, and once again, don’t go in equal shares on a business.  The procedural history is convoluted, but the legal issues are fascinating, at least for those of us who deal in shareholder and business disputes.  The discussions in this case should set the standard for considerations of shareholder agreements and liquidation valuation for a few years to come.  If you’re writing or negotiating a business start-up, read this case now.

On July 9, 2009, I posted about Luckett v. Bodner, a Wisconsin Supreme Court case that dealt with the withdrawal of responses to requests to admit.  One year later, and we’re right back where we started.  In Rivera v. Perez, the court of appeals reviews an Iowa County circuit court case on withdrawing admissions.  There, Perez failed to answer requests to admit, and the opposing parties moved for summary judgment based on the constructive admissions.  The court of appeals decided that the trial court erroneously exercised its discretion by denying Perez’s motion to withdraw the admissions.

The key issue, according to the court of appeals, is the centrality of the admission to the case, not whether there is evidence in the record that may contradict the admission.  Analyzing Luckett:

The court then said that “[t]he first requirement of WIS. STAT. § 804.11(2) emphasizes the importance of having the action resolved on the merits.” Id., ¶38. The court rejected the argument “that withdrawal of an admission cannot subserve the presentation of the merits of the action unless the admission is ’squarely and conclusively contradicted by something in the court’s record,’” holding instead “that withdrawal or amendment of an admission will promote the presentation of the merits of the action even when the admission is not conclusively contradicted by something in the record.” Id., ¶40. The court then concluded that “[t]he [trial] court’s discretionary determination that withdrawal of the plaintiffs’ admissions will subserve the presentation of the merits of the action was not an erroneous exercise of discretion,” because “[t]he parties evidently regard[ed] the question of Ms. Luckett’s damages for conscious pain and suffering as a key issue that they [would] dispute at trial,” and “[t]he plaintiffs’ admissions, if allowed to stand, would [have] effectively eliminate[d] a determination on the merits of these issues.” Id., ¶41. Accordingly, the court concluded that “granting the plaintiffs’ motion to withdraw the admissions aid[ed] in the ascertainment of the truth and the development of the merits,” satisfying the first requirement under § 804.11(2). Id.

So apparently, the only admissions that will not be subject to immediate withdrawal are those that are peripheral to the claims.  Why would anyone bother with admissions that are not central to the case?

Paralleling the prejudice element of the withdrawal inquiry with the application of a discovery penalty, the court established  what appears to be a nearly unreachable hurdle for those who try to enforce admissions.

Here, in contrast, the requests for admissions and interrogatories were approximately two months overdue when Perez moved to withdraw her admissions and provided answers to the requests; Perez agreed to participate in a deposition scheduled for the time period while the requests for admissions were outstanding, and further agreed to reschedule the deposition at the request of counsel; only approximately one month passed between the time of the deemed admissions and Perez’s request to withdraw her admissions; and Perez moved to withdraw her admissions when trial was still several months away.⁽¹⁶⁾ These facts, unlike the facts in Mucek, do not support a reasonable finding that allowing Perez to withdraw her admissions would result in prejudice to Haushalter based on egregious discovery violations.

We conclude that, under Mucek and Luckett, the record does not support a finding of prejudice in this case. While NCI’s egregious conduct supported the trial court’s exercise of discretion in Mucek, the same is not true of Perez’s conduct here. In Mucek, NCI took no action to comply with discovery for two years, separate from its failure to answer the requests for admissions; its first attorney withdrew based on NCI’s refusal to cooperate with discovery; NCI failed to comply with an order by the court compelling discovery; and NCI did not request to withdraw its admissions until five days before trial, and did not respond to Mucek’s requests for admissions until the first day of trial. Mucek, 252 Wis. 2d 426, ¶¶7, 14, 27. Accordingly, the trial court exercised its discretion to find that Mucek would be prejudiced by allowing NCI to withdraw its admissions, saying: “Rarely have I really seen such egregious conduct on the part of a defendant and to come in at the last moment and say the other side is not prejudiced and we should be able to essentially reopen this matter simply doesn’t carry any weight with me.” Id., ¶27.

Read it, perhaps weep, but almost certainly give up using requests to admit.  What’s the point when the only admissions that will stick are those that aren’t central to the case and only made by those who have committed egregious discovery violations?