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.

In Krier v. Vilione, released on June 10, 2009, the Supreme Court revisited issues addressed in Notz, previously discussed below, of shareholder claims, derivative action, and shareholder standing.   The difference is that the shareholder claims in Krier depend upon a showing of accountant malpractice, and a corresponding requirement that the plaintiffs demonstrate standing to bring a claim based upon an accountant assisting his shareholder brother rip off the corporation, which arguably resulted in damage to the other shareholders. 

As with Notz, the Krier case is not a quick read, but worth a look for those interested in shareholder issues and professional liability.  Once again, Bradley and Abrahamson part ways with their colleagues, this time complaining that the court doesn’t follow the reasoning established in Notz (which, ironically, Bradley and Abrahamson dissented from, as well).

In Krier, the majority decided that:

In summary: The plaintiffs do not have standing to assert these claims against the defendant for at least three reasons.  First, the plaintiffs’ claims are inconsistent with traditional corporate law principles and the damages sought are far beyond that afforded to a plaintiff in a derivative action.  In order to initiate a derivative action, a plaintiff must be a current shareholder of the subject corporation.  Second, the plaintiffs’ claims are quite distinguishable from accountant third-party liability jurisprudence, which has traditionally allowed claims for the foreseeable injuries resulting from the accountant’s negligent acts, i.e., the injuries that result when a third party takes action based upon reasonable reliance on misinformation provided by an accountant.  Third, the damages claimed by the plaintiffs do not correspond with the claims alleged

Bradley and Abrahamson argue that the majority’s reasoning is inconsistent with Notz:

This case and Notz are in direct conflict.  In Notz, one shareholder got a disproportionate financial benefit.  It was as though one shareholder was able to put money in its pocket while another was not.  The court concluded that because one shareholder did not receive the same financial benefit as the other, a direct claim could be maintained.  In this case, Michael Vilione actually did put corporate money in his pocket, yet the majority concludes that Krier, who did not receive the benefit, has no direct claim.  Ultimately, due to this conflict with Notz, the majority here confuses the law, giving practitioners and judges no real guidance.

 The plaintiff’s damage claim was also very creative, based upon an expert opinion of the future value of the company if the misappropriations had been prevented.

In Yates v. Holt-Smith, May 14, 2009, the District 4 Court of Appeals confronts an issue that frequently arises in shareholder disputes, particularly in smaller companies that have grown significantly, or been otherwise successful:  When is a payment a dividend? 

In Yates, the company typically paid a year-end bonus to its two shareholders, based on annual profit over a certain amount.  Because this payment was based on the company’s profits, and paid based on ownership interest, rather than productivity, contribution, or the desire to retain either shareholder’s services, the payment was a dividend. 

The court goes on to discuss the existence and breach of fiduciary duty and the business judgment rule — less interesting, but still a good refresher.

It’s pretty apparent, even from a quick read, that neither of the two shareholders is a model citizen.  However, the trial court certainly found one more convincing than the other, which, I think, was the key to both the trial court and appellate court outcome.

On April 29, 2009, a very divided Wisconsin Supreme Court addressed, in a thorough if fractured manner, issues of direct claims for breach of fiduciary duty to a minority shareholder and judicial dissolution.  The decision in Notz v. Everett Smith Group, et. al, 2006AP3156, arises from a motion to dismiss, so it is particularly instructive for those of us drafting or responding to initial pleadings.  However, don’t make the mistake of thinking this case will be a quick read.

The unanimous Court permitted Notz’s fiduciary breach claims based on a so-called “constructive dividend” to proceed, along with his claim for judicial dissolution.  This decision was exhaustively explained, with Roggensack writing a separate concurrence (joined by Gableman) and Bradley also writing a separate concurrence (joined by Abrahamson).  Ziegler did not participate. 

Where Bradley and Abrahamson parted ways with the rest was on the majority’s dismissal of Notz’s claims for breach of fiduciary duty based on loss of corporate opportunity.  Bradley’s arguments that the majority’s reasoning is inconsistent are definitely worth having a look at.