Wisconsin Business and Commercial Litigation

In Polsky v. Virnich, the court of appeals has some suggestions for the Supreme Court.  The court of appeals is unhappy with the rule set forth in Beloit Liquidating, calling it “not sensible.”  Under Beloit Liquidating, a corporation’s officers and directors owe no fiduciary duty to the creditors of the corporation until the corporation is both insolvent and no longer a going concern:

The court’s decision flowed from its holding that “a corporation must be both insolvent and no longer a going concern before a duty is owed to the corporation’s creditors. “  . . .  The court concluded that the corporation was a going concern during the relevant period of time and, therefore, “any claim asserted by Beloit Corporation’s creditors for breach of fiduciary duty and any claim on behalf of Beloit Corporation resulted in no injury to the corporation.”

Polsky, par. 11.  While the Polsky court conceded that it was bound by Beloit Liquidating, it wasn’t happy about the situation. 

The court of appeals commented that the law in most jurisdictions applies a fiduciary duty to officers upon the corporation’s insolvency, regardless of the “going concern” analysis. 

The problem, as we see it, is this:  A business can be run as a “going concern” long after it is insolvent, thus making it a relatively simple matter for the officers and owners of a closely held corporation to strip many of the remaining assets of the “sinking ship” without fear of running afoul of a duty to creditors.  At oral argument before the supreme court, counsel for amicus Wisconsin Bankers Association explained that one consequence of diminished creditor protection is that creditors will make it more difficult and more expensive for many corporations to borrow money.  For example, according to the Association’s counsel, more ‘personal guaranties, regular audits, periodic examinations, [and] stricter underwriting’ will be imposed on corporate borrowers.  Therefore, it appears to us that corporations as a whole would benefit if our supreme court modified the Beloit Liquidating holding to bring it into line with the majority of other jurisdictions.

Stay tuned to this issue to see if the Supreme Court takes up this issue, and whether or not it concurs with its brethren on the lower court.  You can read more on this issue from Alex De Grande of the State Bar of Wisconsin. 

Decaying ship photograph courtesy Michael (mx5tx)’s flickr gallery under this creative commons license.