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    December
    20
    2011

    Issue preclusion bars corporate officer's conspiracy action in federal court


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    Dec. 20, 2011 – A three-judge panel for Seventh Circuit Court of Appeals recently "closed the book" on a years-long, multi-suit squabble between corporate officers, a corporate creditor, and a receiver appointed to preserve the corporation's assets for ultimate distribution.

    Issue preclusion bars corporate officer’s conspiracy action in federal court

    A corporate officer and business owner who claims a bank loan officer, the bank, and a receiver conspired maliciously to damage his reputation already made that argument, panel concludes.

    By org jforward wisbar Joe Forward, Legal Writer, State Bar of Wisconsin

    Issue preclusion bars corporate 
officer’s conspiracy action in federal court Dec. 20, 2011 – A three-judge panel for Seventh Circuit Court of Appeals recently “closed the book” on a years-long, multi-suit squabble between corporate officers, a corporate creditor, and a receiver appointed to preserve the corporation’s assets for ultimate distribution.

    Plaintiff Daniel Virnich, a corporation co-owner and officer, filed a diversity action in federal court alleging that a former creditor, a loan officer, and an appointed receiver conspired to maliciously injure his reputation and his business in violation of Wis. Stat. section 134.01.

    Applying Wisconsin law, the three-judge panel in Virnich v. Vorwald et. al., No. 10-3271 (Dec. 20, 2011), ruled that Virnich met the “plausibility standard” necessary to overcome a Fed. R. Civ. Pro. 12(b)(6) motion, but concluded that issue preclusion barred the case from continuing.

    The panel explained that issue preclusion barred Virnich’s claim because he and his business partner had previously waived, in state receivership court, the argument that a bank loan officer and the court-appointed receiver took improper actions in pursuit of receivership.

    The background

    Through ownership of a holding company, Virnich indirectly owned 50 percent of Communications Products Corporation (CPC), which employed around 250 employees. He was also a CPC director along with Jack Moores, who owned the other 50 percent of CPC.

    CPC entered loan agreements with American Trust and Savings Bank. In 2002, amidst CPC’s financial difficulties, Jeffrey Vorwald became American Trust’s loan officer on the CPC account.

    Vorwald developed personal animosity towards Moores and Virnich, it was alleged in federal court pleadings, when they refused to personally guarantee CPC’s loans. Vorwald subsequently sought and obtained appointment of Michael Polsky as a receiver to preserve CPC’s assets.

    Virnich and Moore sought to contest as improper the appointment of Polsky as receiver, alleging that Polsky and Vorwald submitted false and misleading affidavit’s to support American Trust’s motion for a receivership. But they later withdrew the objection.

    In 2003, the state court approved the sale of CPC.

    Two years later, the receivership court stayed a motion to challenge the receiver appointment, pending an appeal in another case. In his role as receiver, Polsky had filed a lawsuit in state court against Moores and Virnich, alleging a breach of fiduciary duties owed to CPC.

    That lawsuit resulted in a $6.5 million verdict against Moores and Virnich, but the Wisconsin Supreme Court effectively overturned the verdict in March.

    In February 2011, after Virnich filed the federal lawsuit against Polsky, Vorwald, and American Trust for conspiracy under Wis. Stat. section 134.01, the state receivership court ruled that Virnich had waived a right to challenge as improper the appointment of Polsky as receiver.

    Issue precluded

    Because of the waiver, the panel for the Seventh Circuit Court of Appeals ruled that Virnich’s claims under section 134.01 were barred by issue preclusion. Moores was not a party.

    “The receivership court has found that Virnich’s arguments that the actions taken by Vorwald and Polsky in pursuit of and in furtherance of the receivership were improper are waived,” wrote Judge David Hamilton. “Virnich cannot bring his nearly identical allegations in the guise of a section 134.01 conspiracy action without running headlong into the principle of issue preclusion.”

    In addition, the panel found that application of issue preclusion to bar Virnich’s claim would not be fundamentally unfair. “[Virnich] has attempted to bite this apple not just twice but three times. The doctrine of issue preclusion bars him from doing so,” Hamilton wrote.