Wisconsin Business and Commercial Litigation

This is a big one — a business dispute within a large Wisconsin company fanned by the flames of bitter inter-family arguments between a father and his two sons.  The father, Jack Link, and his two sons, Jay and Troy Link, were all shareholders in Minong, Wisconsin based Link’s Snacks, which you may recognize as “Jack’s Snacks” from the popular “Messing with Sasquatch” ad series.  

In 2005, Jack and Troy filed suit seeking to force Jay to surrender his stock in the company.  Not to be outdone, Jay counterclaimed, alleging that Jack and Troy had conspired to force him out of the company and buy his shares at a discount price.  After a six week jury trial, it became apparent that Jack, Troy, and Jay had all breached duties, and awarded a variety of damages.  The court forced Jay to sell his shares, and found that he, a minority shareholder, had not been oppressed under Wis. Stat. 180.1430(2)(b).  The jury also awarded punitive damages in the amount of $5 million to Jay from Jack, and for $5 million from Jay to Link’s Snacks. 

A flurry of post-verdict motions followed.  Interestingly, Jack filed his motions at 4:32, two minutes after the close of business on the due date.  Luckily for him, the clerk accepted the filing, anyway.  The post-trial motions convinced the trial court to reduce the punitive damages verdicts, and the result was:

Jay was ordered to pay $1 in compensatory damages and $1 in punitive damages to Link Snacks and $1 in compensatory damages and $1 in punitive damages to L.S.I., and Jack was ordered to pay Jay compensatory damages in the amount of $736,000 and punitive damages in the amount of $736,000.

Everyone appealed.  The Wisconsin court of appeals affirmed the reduction of punitive damages awarded to Link’s Snacks and to LSI;  reversed the reduction of the $5 million punitive damages award to Jay, because Jack’s post-verdict motions were untimely, and could not form the basis for a reduction;  and decided that because Jay surrendered his shares as ordered by the court, the benefit-estoppel doctrine acted to waive his right to appeal any other portion of the trial court’s verdict.

To make a long story even longer, the Wisconsin Supreme Court, in a decision written by Justice Gableman, decided the case this way:

(1) The circuit court erred in remitting the award of punitive damages against Jack. The circuit court’s reliance on Treadway in considering Jack’s tardy postverdict motion was misplaced. Treadway does not apply to multi-phase civil actions, such as the instant case. Further, we would decline to extend the bright-line rule of St. John’s Home in order to limit the discretion of the clerk of circuit court in accepting pleadings received after usual business hours. Accordingly, we affirm the court of appeals in its conclusion the circuit court improperly considered Jack’s postverdict motion.

(2) The court of appeals properly rejected Jay’s oppression claim under Wis. Stat. § 180.1430(2)(b). We do not address, however, whether Jay waived his right to bring his oppression claim under the benefit-estoppel doctrine because we conclude he does not have standing to appeal his oppression claim under § 180.1430(2)(b). The statutory language of § 180.1430(2)(b) clearly states that a party must be a “shareholder” in order to seek judicial dissolution of a corporation. Jay lost his status as a shareholder in Link Snacks when he surrendered his shares under the Buy-Sell Agreement. Therefore, we affirm the court of appeals on this issue, but on different grounds.

(3) Jay did not, under the benefit-estoppel doctrine, waive his right to appeal the circuit court’s decision to limit the evidence Jay could present regarding his theory of damages relating to his breach of fiduciary duty claims against Jack and Troy. The contractual obligations set forth in the Buy-Sell Agreement, which were enforced by the circuit court, would not be affected if Jay, on appeal, was successful in arguing that the circuit court erred in limiting the evidence Jay could present regarding his theory of damages relating to his breach of fiduciary duty claims against Jack and Troy. Consequently, the benefit-estoppel doctrine is inapplicable to Jay’s appeal of the circuit court’s decision to limit the evidence Jay could present regarding his fiduciary duty damages theory relating to his breach of fiduciary duty claims against Jack and Troy. We therefore reverse and remand to the court of appeals to decide whether the circuit court erred in limiting the evidence Jay could present regarding his theory of damages relating to his breach of fiduciary duty claims against Jack and Troy.

This is a fascinating case for anyone involved in shareholder litigation, and a cautionary tale for all litigators.  Get your motions and other papers filed timely!  When it comes to high-stakes litigation, the need to address all details can soak up the time you need to get the documents to the court.  While this sort of thing can happen to anyone, the Supreme Court has signalled its position on leniency.

A recent unpublished decision on dissolution and shareholder injury revisits the Supreme Court’s decision in Notz.  In Altergott v. Helene Altergott Family Corporation, 2008 AP1944 (June 16, 2009), the District 3 court of appeals cited Notz in its holding that the primary injury was to the corporation, rather than to the plaintiff shareholder. 

[O]ur definition of oppressive conduct “requires that those in control of a corporation willfully treated some of the shareholders in a wrongful manner to which other shareholders were not subjected.”

Step one in bringing (or defending) a shareholder oppression/dissolution claim must be to identify the primary injury and the injured.

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.