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    Supreme Court Digest

    Daniel Blinka; Thomas Hammer

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    Wisconsin Lawyer
    Vol. 77, No. 12, December 2004

    Supreme Court Digest

    This column summarizes all decisions of the Wisconsin Supreme Court (except those involving lawyer or judicial discipline, which are digested elsewhere in the magazine). Profs. Daniel D. Blinka and Thomas J. Hammer invite comments and questions about the digests. They can be reached at Marquette University Law School, 1103 W. Wisconsin Ave., Milwaukee, WI 53233, (414) 288-7090.

    by Prof. Daniel D. Blinka &
    Prof. Thomas J. Hammer

    * *

    Commercial Law

    Fraudulent Transfers - Agents - Undisclosed Principal

    Badger State Bank v. Taylor, 2004 WI 128 (filed 2 Nov. 2004)

    Badger State Bank made a business loan to Ag-Tech, whose president and sole shareholder was Al Vogt. Ag-Tech owed the bank more than $400,000. The Taylors did business with Ag-Tech, and they owed it about $13,000. They also did business with another entity with which Vogt was involved, A&T Livestock. A&T Livestock owed the Taylors about $18,000. Vogt and the Taylors agreed to cancel accounts receivable. Vogt also agreed to pay the $5,000 differential owed to the Taylors from an Ag-Tech account, even though A&T Livestock owed the debt. The bank sued to set aside the cancellation of the accounts receivable and the cash payment on the ground that they were fraudulent transfers under Wis. Stat. section 242.05(1). The circuit court ruled in favor of the Taylors, who alleged they thought they were dealing with Al Vogt personally, not with the corporate entities. The court of appeals reversed.

    In an opinion authored by Chief Justice Abrahamson, the supreme court affirmed the court of appeals and thus ruled in the bank's favor. "A creditor pursuing a claim under Wis. Stat. §242.05(1) must satisfy three requirements: (1) the creditor's claim arose before the transfer was made; (2) the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer; and (3) the debtor either was insolvent at the time of the transfer or became insolvent as a result of the transfer" (¶ 14).

    This appeal concerned two of the requirements under section 242.05(1). First, the court held that the cancellation transferred an asset of Ag-Tech. In essence, the Taylors contended that they "believed they were dealing with Al Vogt personally and were unaware of the corporate and legal status of either Ag-Tech or A&T Livestock" (¶ 18). Rejecting this "fallac[ious]" contention, the supreme court observed that "the Taylors are looking at the transactions as involving only two parties (the Taylors and Al Vogt), rather than as involving three or four parties (the Taylors, Al Vogt, Ag-Tech, and A&T Livestock). By treating the transactions as involving only two parties, the Taylors ignore principles of agency law and Wis. Stat. §242.05(1). Wisconsin Stat. §242.10 provides that the law relating to principal and agent supplements chapter 242. Nothing in §242.05(1) indicates that it displaces the law relating to principal and agent" (¶ 22).

    Agency law dictated that Ag-Tech "was either a partially disclosed principal or an undisclosed principal," and Vogt was its agent (¶ 22). "An undisclosed or partially disclosed principal, like Ag-Tech, becomes a party to a transaction between the agent (Al Vogt) and the third party (the Taylors) even if the third party (the Taylors) is unaware of the name or existence of the principal. Thus, had the Taylors defaulted in paying Al Vogt, Ag-Tech could have sued the Taylors for the funds they owed the corporation. Likewise, had Al Vogt (or Ag-Tech) failed to perform under the sales agreements, the Taylors could have sued either Al Vogt, or Ag-Tech, or both" (¶ 26).

    "Under agency law Al Vogt acted as agent on behalf of his principal (Ag-Tech) in canceling the account receivable and giving the Taylors the check drawn on Ag-Tech's account. Because Ag-Tech made the transfers to the Taylors (through its agent, Al Vogt), under Wis.Stat.§242.05(1), Ag-Tech is the transferor of the account receivable and the check" (¶ 26).

    Second, the court held "that Ag-Tech did not receive reasonably equivalent value for the loss of its cash and account receivable" (¶ 31). Only A&T Livestock and the Taylors benefited from the transaction (see ¶ 30).

    In addition, the court held that "good faith is not relevant" in claims brought under section 242.05(1) because it is a "`constructive fraud' provision" (¶ 15). The Taylors' arguments in support of such a good faith exception conflicted with the policy behind the statute (see ¶ 40).

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    Remedies

    Economic Loss Doctrine - Service Contracts

    Insurance Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139 (filed 9 Nov. 2004)

    After an egg farm's barn ventilation system failed, the farm sued Cease Electric, which had installed the system. A jury found that Cease Electric had negligently caused the system failure, which in turn caused the egg farm to lose income (and chickens). The circuit court and the court of appeals rejected Cease Electric's argument that the tort claim was barred by the economic loss doctrine.

    The supreme court, in an opinion written by Justice Bradley, affirmed in an opinion that permitted the court "an opportunity to further define the parameters of the economic loss doctrine in Wisconsin" (¶ 14). "From its inception, the doctrine has been based on the understanding that contract law, and particularly the law of warranty, is better suited than tort law for dealing with purely economic loss in the commercial arena" (¶ 15). First, the court held that the "contract at issue was for services, and not for a product" (¶ 18). Billing records and other evidence supported this finding.

    The second, more critical issue was whether the economic loss doctrine should extend to contracts for services as well as contracts for goods and products. The court held that it did not. Cease Electric's argument "assumes that contract law is better suited than tort law for dealing with purely economic loss in the context of service agreements." The most important factor to the court was that service contracts are not protected by the "the well-developed law under the U.C.C." (¶ 35).

    The court assessed the relative capacities of tort law and contract law to accommodate the risk of negligently provided services and concluded "that the policy considerations underlying the economic loss doctrine do not support its extension here" (¶ 48). Of special note, the court explicitly refused to place itself on the "slippery slope of having to decide whether an exception should be made for some or all professional groups" (¶ 50).

    After an egg farm's barn ventilation system failed, the farm sued Cease Electric, which had installed the system. A jury found that Cease Electric had negligently caused the system failure, which in turn caused the egg farm to lose income (and chickens). The circuit court and the court of appeals rejected Cease Electric's argument that the tort claim was barred by the economic loss doctrine.

    The supreme court, in an opinion written by Justice Bradley, affirmed in an opinion that permitted the court "an opportunity to further define the parameters of the economic loss doctrine in Wisconsin" (¶ 14). "From its inception, the doctrine has been based on the understanding that contract law, and particularly the law of warranty, is better suited than tort law for dealing with purely economic loss in the commercial arena" (¶ 15). First, the court held that the "contract at issue was for services, and not for a product" (¶ 18). Billing records and other evidence supported this finding.

    The second, more critical issue was whether the economic loss doctrine should extend to contracts for services as well as contracts for goods and products. The court held that it did not. Cease Electric's argument "assumes that contract law is better suited than tort law for dealing with purely economic loss in the context of service agreements." The most important factor to the court was that service contracts are not protected by the "the well-developed law under the U.C.C." (¶ 35).

    The court assessed the relative capacities of tort law and contract law to accommodate the risk of negligently provided services and concluded "that the policy considerations underlying the economic loss doctrine do not support its extension here" (¶ 48). Of special note, the court explicitly refused to place itself on the "slippery slope of having to decide whether an exception should be made for some or all professional groups" (¶ 50).

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