Wisconsin Business and Commercial Litigation

On Friday, January 13th, 2012, the Supreme Court heard oral argument from the three remaining parties to the litigation arising from a 2000 e. coli outbreak at a Milwaukee-area Sizzler restaurant.  This case, begun in 2000, is the longest-running I’ve ever been involved with. 

The issues presented to the court have implications for warranty and UCC interpretation, equitable indemnity, the Weinhagen exception to the American attorney fee rule, and contractual indemnity and offset for insurer payments.  If you’re interested in reviewing the briefs filed with the Supreme Court, you can find them on the appellate version of CCAP, called WSCCA (Wisconsin Supreme Court and Court of Appeals Access).  For easy access and searching, the appellate case number is 09AP1212 (a number I will likely not be able to forget).  The court of appeals briefs are available on the same page.

This decision is sure to hold interest for pretty much all Wisconsin attorneys who practice in civil litigation.  The court of appeals decision, authored by Judge Fine and filed on June 7, 2011, is available here.

In Briggs & Stratton v. Generac Power Systems (Feb. 8, 2011), these two Wisconsin industrial heavyweights went toe-to-toe over the interpretation of contract language by Milwaukee Circuit Court Judges Jean DiMotto and Bill Pocan.  In 2001, Briggs purchased the assets of Generac’s Portable Products Division.  Four years earlier (1997), Generac created its Portable Products Division, later selling the Division by means of a 1998 Asset Purchase and Sale Agreement to GPPC, which then sold its rights in the Agreement to Briggs. 

A 2005 products lawsuit began the disagreement between Generac and Briggs.  The 2005 lawsuit sought damages arising from the use of a generator manufactured in 1992.  Generac tendered defense of the lawsuit to Briggs, who refused the tender and brought a declaratory judgment action to determine who was on the hook for the defense.

Citing basic rules of grammar and punctuation, the court determined that Briggs only bought liabilities arising after the Division was formally created:

As relevant to this appeal, the parties agreed the Assumed Liabilities consist only of “[a]ll liabilities of [Generac] related to the Division arising in the ordinary course of business after the Closing Date directly on account of [Generac's] ownership and operation of the Division prior to the Closing Date.”  The qualifying phrase “prior to the Closing Date” modifies the next preceding phrase “directly on account of Seller’s ownership and operation of the Division.”  See Hope Acres, Inc., 27 Wis. 2d at 291.  Because the Division did not exist until January 1, 1997, Generac could not have owned or operated the Division before that time.  The Closing Date identified in the Agreement is June 30, 1998.  Thus the Assumed Liabilities for which Briggs agreed to be responsible must relate to Generac’s ownership or operation of the Division between January 1, 1997 and June 30, 1998.  The portable generator involved in the Thompson claim was manufactured in 1992 and sold by Generac several years before the Division existed.  Generac did not own the generator when it operated the Division or when it sold all of the Purchased Assets to Briggs.

The court also relied on the default asset purchase rule that an asset purchaser does not purchase liabilities, unless expressly or impliedly agreed.

Yet another reminder to carefully word your agreements and carefully define terms.

Portable generator photo courtesy Sarvodaya Sri Lanka’s flickr gallery via this creative commons license.

Like many others, I took a little time off around the holiday, and now I’m playing catch up on Wisconsin business and commercial litigation cases that came out late in 2010.  The case below has a good discussion of the application of merger clauses and the parol evidence rule, a must for anyone who deals with contracts even occasionally.

In Town Bank v. City Real Estate, 2010 WI 134 (Dec. 14, 2010), the parties signed a commitment letter outlining the expected financing for a condo development in Milwaukee, Wisconsin.  Later, the parties signed a Term Credit Agreement (TCA) that included a merger clause encompassing all previous agreements and discussions.  When the relationship fell apart, and City Real Estate had to obtain alternative financing, Town Bank sought a declaration that it had fully complied with the TCA, and City Real Estate counterclaimed for breach.

The Supreme Court summarized the applicable merger clause / integration law and its effect on the application of the parol evidence rule:

However, as Town Bank accurately points out, when the contract contains an unambiguous merger or integration clause, the court is barred from considering evidence of any prior or contemporaneous understandings or agreements between the parties, even as to the issue of integration. See Dairyland Equip. Leasing, 94 Wis. 2d at 608; Matthew, 54 Wis. 2d at 341-42. Again, this principle stems from basic contract law: if the contract is unambiguous, the court’s attempt to determine the parties’ intent ends with the language of the contract, without resort to extrinsic evidence. See Huml, 293 Wis. 2d 169, ¶52. In Dairyland Equipment Leasing, this court defined a merger clause as a “written provision which expressly negatives collateral or antecedent understandings.” 94 Wis. 2d at 608. Thus, by definition, an unambiguous merger or integration clause demonstrates that the parties intended the contract to be a final and complete expression of their agreement. See id.; Matthew, 54 Wis. 2d at 341-42. The contract is therefore fully integrated, and the parol evidence rule goes into effect.

In the end, the Court determined that the merger clause effectively integrated the agreements between the parties, and the parol evidence rule applied.  As a result, the Court also determined that the TCA had been fully complied with, and affirmed the decision of the appellate court.  Justices Bradley and Abrahamson dissented, providing good fodder for arguments on both sides of future merger clauses.

In BV/B1, LLC v. InvestorsBank, the court of appeals reviewed a summary judgment decision by Judge Kahn in the Milwaukee County Circuit Court awarding $833,798.52 to InvestorsBank.  BV/B1 sought financing from InvestorsBank without the necessity of personal guaranties from the borrower’s principals.  InvestorsBank was willing to provide the financing, but required that the agreement provide a penalty for prepayment of the loan.  The penalty provision, drafted specifically for the contract, read: 

If the loan is prepaid in full or in part at any time on or before July 30, 2006 there shall be no prepayment penalty. If the loan is prepaid in full or in part at any time after July 30, 2006 or if the prepayment is the result of an acceleration due to an event of default, the prepayment penalty shall be equal to the fixed rate on the loan minus the yield on a US Treasury Bond with a maturity similar to the number of years remaining on the fixed rate loan plus 2.5% times the number of years remaining at a fixed rate times the outstanding principal balance of the loan.

Naturally, there was a prepayment (if there wasn’t, the story would have ended happily), and a fight over how to calculate the prepayment penalty.  The court of appeals considered and discarded BV/B1’s three different suggestions, and also disagreed that InvestorsBank waived its right to collect its penalty. 

The best lesson to draw from this case is to take care in negotiating and drafting contract clauses.  Lawyers will pick everything apart with the benefit of hindsight, and unless you’ve got things completely screwed down, they’re going to get screwed up.

First of all, I must apologize for the lag in posting here.  I was on vacation for a week, and upon returning, have been completely underwater with a brief in the court of appeals.  However, since I’ve now caught up (kind of), I anticipate that I’ll return to my schedule of regular posting.  On to the interesting part.

Many of the companies with whom I work use venue provisions in the contracts they sign with customers or suppliers.  This is, of course, particularly helpful for companies that do business throughout the world or the country.  It can also be useful for companies that work statewide, making sure that they retain home-field advantage by designating the county that will serve as the site of any litigation. 

Venue provisions are often contested, and almost as often, the opposing party will start an action in the venue that it prefers, rather than travel to the venue designated in the contract.  While I won’t talk today about drafting strong venue provisions in general, a venue provision can carry some extra teeth by adding a separate provision to the contract requiring the payment of attorney fees.

When combined with an attorney fee provision, a strong venue provision provides extraordinary leverage.  It can be challenged, but the financial risk of the litigation just increased, along with the possibility of fighting a two-front war, and being on the hook for the fees incurred in both.  If you’ve already got a venue provision, add the attorney fee provision.  And if you’ve already got both, consider specifically linking the two, or making clear that the fee provision applies to all litigation arising from the relationship, including any cases started in the wrong venue.

World map photo courtesy Norman B. Leventhal Map Center at the BPL flickr gallery via this creative commons license.

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.

“Unconscionability is an amorphous concept that evades precise definition.” Wisconsin Auto Title Loans, Inc. v. Jones, 2006 WI 53, ¶31, 290 Wis. 2d 514, 714 N.W.2d 155.

Not exactly where you want the court of appeals to start when analyzing whether or not an arbitration provision is unconscionable.  It looks like a set-up to get where they want to go without having to rely on anything other than some generalized, and rarely consistent, sense of fairness.

Beginning with just that statement in Cottonwood Financial v. Estes, the District III court of appeals reviewed a Pierce County decision regarding the claimed unconscionability of an arbitration provision in a payday lending contract.  To its credit, court steered clear of fuzzy and emotional thinking and went to the heart of the matter, which in this case was a provision that prevented the plaintiff from being part of a class action suit:

Finally, we reach, and accept, Estes’s argument that the arbitration agreement was substantively unconscionable because it precluded her from proceeding as a member of a class.  The arbitration provision states:

You are waiving your right to serve as a representative, as a private attorney general, or in any other representative capacity, and/or to participate as a member of a class of claimants, in any lawsuit filed against us …. [A]ll disputes including any representative claims against us … shall be resolved by binding arbitration only on an individual basis with you. Therefore, the arbitrator shall not conduct class arbitration; that is, the arbitrator shall not allow you to serve as a representative, as a private attorney general, or in any other representative capacity for others in the arbitration. (Capitalization and bold omitted.)

This provision runs afoul of WIS. STAT. § 421.106(1), which provides, “[A] customer may not waive or agree to forego rights or benefits under” the consumer act. WISCONSIN STAT. § 426.110(1) explicitly recognizes a consumer’s right to “bring a civil action on behalf of himself or herself and all persons similarly situated.”

The lesson:  take care to ensure that your contracts don’t over-reach, particularly when dealing with consumers.  Also, the case provides a pretty good shorthand lesson on unconscionability in contract language.

As I’ve mentioned in previous posts, I’m going to be attending the spring conference of the Wisconsin Chapter of the Association of Corprorate Counsel, which happens on May 20-21 in Elkhart Lake (more information here).  Chris Schilder, litigation counsel for SafWay Services, and I will be talking with the members about managing contract disputes, and specifically about three areas that apply uniquely to in-house counsel.

Our discussion, one of many presentations as you can see from the materials, is going to touch mainly on three areas:  managing ongoing business relationships while in a dispute, what problems can arise from scope of work descriptions, and the impact of indemnification provisions and potential funding for litigation.  Chris and I have been working together on this for a while now and look forward to providing some insight and assistance to WisACCA members and anyone else who attends.