Vol. 78, No. 4, April
Corporate Chaos: Replacing Home Rule with Foreign Law
In its 2004 decision in Beloit Liquidating Trust v. Grade,
the Wisconsin Supreme Court applied an unusual and imprecise
choice-of-law analysis to determine which state's law a corporation must
follow and rejected the long-standing internal affairs doctrine, which
favors the incorporating state's law. The decision introduces
uncertainty and chaos in business formation and litigation.
by Shirley A. Wiegand
n a surprising decision, the Wisconsin Supreme
Court recently held that the law of Wisconsin, not Delaware, determined
the duty corporate officers and directors owe to creditors of a
Delaware-registered corporation when the corporation had strong ties to
Wisconsin. In its decision, the court relied on an unusual choice-of-law
analysis and rejected the "venerable choice-of-law principle" known as
the internal affairs doctrine.1 The decision
will force attorneys representing corporate clients to do battle with
Wisconsin's imprecise choice-of-law methodology, will likely lead to
forum-shopping and higher litigation costs, and may result in
retaliation against Wisconsin corporations when they are sued in other
Shirley A. Wiegand,
Kentucky 1983, is professor of law at Marquette University Law School,
where she teaches civil procedure, conflicts of law, and remedies. Prof.
Wiegand has published numerous articles on conflicts of law, civil
litigation, and dispute resolution.
In Beloit Liquidating Trust v. Grade,2 a group of unsecured creditors filed suit against
seven officers and directors of Beloit Corporation (Beloit), claiming
the officers and directors breached their fiduciary duty by negligently
mismanaging and wasting corporate assets, which damaged the corporation
and its creditors in excess of $300 million.3 Beloit (a Delaware corporation), Harnischfeger
Industries Inc. (its 80 percent corporate parent), and other affiliated
companies filed for chapter 11 bankruptcy protection in Delaware on June
7, 1999. In May 2001 the bankruptcy court approved Beloit's plan of
reorganization. At the same time, the bankruptcy court authorized the
official committee of unsecured creditors of Beloit to commence a
lawsuit on Beloit's behalf against its officers and directors and
subsequently transferred that authority to the plan administrator of the
liquidating trust (trust) as specified in the reorganization
plan.4 The trust filed a lawsuit in
Milwaukee County circuit court in June 2001.
Eventually the circuit court dismissed all claims, and the trust
appealed. The central question was whether the Beloit officers and
directors owed a duty to the company's creditors before Beloit ceased
doing business. The trust argued that, under Delaware law, a fiduciary
duty arises whenever a corporation is insolvent regardless of whether it
continues doing business. Thus, the officers and directors owed a duty
to creditors well before the filing of bankruptcy, and that duty was
breached by several of their decisions and actions as early as 1996,
several years before filing bankruptcy. But the circuit court held, and
the supreme court agreed, that Wisconsin law applies and, under such
law, no duty is owed unless a company is both insolvent and no longer
doing business. During the time in question, though it may have been
insolvent, Beloit was doing business until it filed bankruptcy.
The Internal Affairs Doctrine
Key to the Wisconsin Supreme Court's analysis was the choice of law.
Under Delaware law, it is at least arguable that the officers and
directors owed a duty to the creditors. Under Wisconsin law, the court
held, no duty was owed because the corporation continued doing
The Seventh Circuit Court of Appeals has noted that, "[w]hen the
subject is liability of officers and directors for their stewardship of
the corporation, the law presumptively applicable is the law of the
place of incorporation." This principle, known as the internal affairs
doctrine, "is recognized throughout the states, and by the Supreme Court
as well."5 It has also been incorporated
into Restatement (2d), Conflict of Laws, which holds that the law of the
state of incorporation presumptively applies "to determine the existence
and extent of a director's or officer's liability to the corporation,
its creditors and shareholders," unless another state bears a more
significant relationship to the parties and transaction.6 Most states adhere to the doctrine, though both
California and New York have legislatively rejected it under specified
circumstances. In Wisconsin, the legislature has adopted the internal
affairs doctrine for limited partnerships and for aspects of shareholder
The doctrine can be justified on several grounds. First, it
establishes certainty and predictability, which leads to lower
litigation costs. Though a corporation may do business in many places,
though its headquarters may be spread out over two or more states (or
countries), though it may transfer its principle place of business from
one state (or country) to another, it can and will have but one
permanent "domicile," its place of incorporation. The law of that place
dictates the conduct of corporate officers and directors. Thus, to
promote predictability and certainty in corporate governance, the law of
the domicile governs.
A second justification is that by choosing where to incorporate,
corporate organizers have chosen not only a physical location but also
the law that will apply to its corporate governance. This, it can be
argued, constitutes an implied choice of law that should be honored.
Doing so protects the parties' justified expectations. When a business
entity decides to incorporate in Delaware, for example, it does so for a
reason and thereby commits itself to exist - to operate - under Delaware
law. That does not mean, of course, that if a simple tort or breach of
contract action arises in some other place that Delaware law will
inevitably govern; generally it will not, because a tort or breach has
little to do with corporate governance and operation. But the conduct of
officers and directors has everything to do with how the corporation
operates - and thus the law of its domicile governs. In addition,
applying the law of the incorporating state protects corporate officers
and directors from being held to differing standards of conduct from
state to state. They need only conform their conduct to the law of the
A third justification for the internal affairs doctrine is that the
state of incorporation has a strong interest in the operation of its
companies. "An incorporating state will likely want to ensure that its
corporations are not used improperly or fraudulently."8
Despite these justifications, the internal affairs doctrine is not
absolute. It permits the law of another state to apply in some
instances. For example, section 302 of the Restatement (2d), Conflict of
Laws, provides that the law of the incorporating state applies to issues
involving the "internal affairs" of a corporation, that is, "the
relations inter se of the corporation, its shareholders, directors,
officers or agents," except in the "unusual case where ... some
other state has a more significant relationship to the occurrence and
the parties...."9 Section 309
specifically addresses the issue involved in Beloit; it
provides that the incorporating state's law "will be applied to
determine the existence and extent of a director's or officer's
liability to ... its creditors ... except where, with respect to
the particular issue, some other state has a more significant
relationship." Thus, section 302 raises a strong presumption and section
309 raises an ordinary presumption that the incorporating state's law
will apply, but either presumption can be replaced by the law of a state
that has a more significant relationship to the parties and transaction.
Cases abound in which courts have found the presumption overcome because
of a stronger interest held by a nonincorporating state.
The Court's Choice-of-law Analysis
Although a strong case could be made for the application of Delaware
law, the court's choice of Wisconsin law in Beloit is not
shocking. What is surprising is the court's unusual choice-of-law
analysis and its implications.
The argument against applying Wisconsin law under the Beloit
facts is strong. Beloit Corporation is domiciled - incorporated - in
Delaware. When company officials decided to file bankruptcy, they
returned to the corporate home state to do so. The company thus began
and ended its business existence in its home state. For a part of the
relevant period, corporate headquarters were in Illinois, where four of
the seven defendants resided, even though for most of its existence, the
primary place of business was in Beloit. The company operated 65
wholly-owned or partially-owned subsidiaries, including locations in the
United Kingdom, Asia, Italy, Poland, and Austria. Two of the most
significant negligent acts complained of occurred in Massachusetts and
Asia, though decisions preceding those acts may have occurred in
Wisconsin. Only one of the seven defendants was a Wisconsin
resident.10 Under these circumstances
involving a multi-national corporation, the internal affairs doctrine
provides a clear, rational, predictable choice-of-law rule that makes
sense: Apply the law of the only permanent place of corporate domicile -
the place of corporate birth.
On the other hand, a strong argument can be made that Wisconsin has
an even more significant relationship to the parties and transactions.
Beloit's principal place of business was located in Wisconsin for 140
years, the stock's majority owner (Harnischfeger) was headquartered in
Wisconsin, and the officers and directors undoubtedly conducted business
in Wisconsin at Beloit's headquarters. Furthermore, the unique
circumstances of the case do not fit one important rationale of the
internal affairs doctrine, that is, the risk of being subjected to
states' differing standards. Because the case began in bankruptcy court
and consolidated the creditors' claims, the law chosen in
Beloit is determinative of all creditor claims against the
officers and directors.
Had the court adopted the internal affairs doctrine, it would have
begun with the presumptive rule favoring Delaware law and then
determined whether the presumption was overcome. Instead, in a unanimous
opinion authored by Justice Crooks,11 the
court rejected the internal affairs doctrine altogether and, in the
process, may have created ambiguity and confusion in two respects.
The first involves its reliance on Wis. Stat. section 180.1704, which
states that chapter 180 "applies to all foreign corporations transacting
business in this state on or after January 1, 1991." However, none of
chapter 180's provisions pertain to the duty that corporate officers and
directors owe to creditors. The chapter simply provides no substantive
law for the issue in Beloit. Indeed, the court cautiously noted
that the language of section 180.1704 is "helpful in discerning our
legislature's intent with respect to corporations and choice of law
principles." The language "supports the holding" but does not mandate
By basing its decision on chapter 180, the court suggested that
Wisconsin law governs all issues involving corporations transacting
business in Wisconsin simply because chapter 180 governs some aspects of
corporate conduct. The court suggested that, because the legislature
intended to place some statutory restraints on companies doing business
in Wisconsin, the legislature intended for Wisconsin law to always
Next, the court bolstered its choice-of-law decision by applying
Wisconsin's choice-of-law rules, but in doing so the court employed a
test that will likely create confusion. Historically, Wisconsin has
applied Leflar's "better law" analysis to tort claims. That analysis
directs a court to consider five choice-influencing considerations when
choosing the applicable law: predictability of results, maintenance of
interstate and international order, simplification of the judicial task,
advancement of the forum's governmental interests, and application of
the better rule of law.13 But the court in
Beloit begins its analysis by holding that "application of
Delaware law ... would constitute officious intermeddling with the
laws of Wisconsin." The "officious intermeddling" test first surfaced in
1973 in Hunker v. Royal Indemnity Co., in which the court
indicated that this test referenced constitutional concerns;
choice-of-law analysis should proceed only if "the facts on their face
reveal that to apply any of multiple choices of law would not constitute
mere officious intermeddling, in the constitutional sense."14 A true constitutional analysis in
Beloit clearly would have permitted the court to apply Delaware
A court cannot apply the law of a state if doing so would violate the
U.S. Constitution. Well-established U.S. Supreme Court decisions dealing
with choice of law focus primarily on the Constitution's due process and
full faith and credit clauses. Beginning with Home Insurance Co. v.
Dick and culminating in Allstate Insurance Co. v. Hague
and Phillips Petroleum Co. v. Shutts, the U.S. Supreme Court
has established constitutional limits on choice of law. In short, the
Court will invalidate "the choice of law of a State which has had no
significant contact or significant aggregation of contacts, creating
state interests, with the parties and the occurrence or
transaction."15 The test, easily overcome
in most cases, is clearly satisfied when a state serves as the place of
incorporation - the domicile - and also as the place in which the
corporate bankruptcy was filed and in which a court authorized the
lawsuit itself. In Beloit, Delaware clearly had a "significant
contact" with the parties and the transaction.
But the Wisconsin Supreme Court, though referring to "officious
intermeddling," really performed no constitutional analysis at all; it
merely counted the number of contacts that Beloit Corporation had with
Wisconsin. So what did the court mean? Apparently it meant that
Wisconsin's interest is greater than Delaware's interest. That is a
rational conclusion, but the court need not have muddied the
choice-of-law waters by introducing an undefined and confusing
"officious intermeddling" test. All it needed to do was move immediately
to Wisconsin's own "better law" analysis and conclude that the internal
affairs doctrine's presumption of Delaware law had been overcome.
Implications for Future Cases
The Wisconsin Supreme Court's opinion suggests that the court has
solidly rejected the internal affairs doctrine including even its
presumption that the incorporating state's law should apply. Indeed, a
case decided the following month parroted the court's analysis,
including the reference to both Wis. Stat. section 180.1704 and the
officious intermeddling test.16 The court's
decision in Beloit creates concerns in two areas, one
substantive and the other procedural.
The substantive concern is that the court has rejected the internal
affairs doctrine, a doctrine that advances certainty and predictability
and thereby minimizes transactional costs. Rather than presume that
matters related to corporate governance will be governed by the law of
the incorporating state, parties will now have to perform what is
generally an imprecise choice-of-law analysis in each case, no doubt
leading to increased litigation costs. The court's decision will
encourage forum shopping and may also influence an organization's
decision as to where to incorporate or where to locate a principal place
of business. Wisconsin corporations may find, too, that they will not
benefit from Wisconsin law when sued in other states.
The procedural concern is the way in which the court reached its
decision once it rejected the internal affairs doctrine - relying on an
unusual, and unsatisfactory, choice-of-law analysis. Though the court
arguably reached the correct result, future decisions should articulate
a sounder methodology.
First, the court should make it clear that chapter 180 does not
provide a Wisconsin choice-of-law rule for all issues that involve
corporations transacting business in Wisconsin. Such a broad rule would
surely go further than the legislature intended and might prompt
retaliatory action by other states. Such a parochial approach cannot be
what the court intended.
Second, the court will need to abandon its inexact "officious
intermeddling" test. If by using such a test it means to conduct a
constitutional analysis, then it should do so by reliance on U.S.
Supreme Court jurisprudence that has evolved over time. If the facts of
a case suggest no constitutional violation (and they rarely will), the
court should move directly to choice-of-law analysis and apply the
The Wisconsin Supreme Court's decision in Beloit represents
a break with historical practice in this country. The court rejected the
internal affairs doctrine that presumptively favors the incorporating
state's law. Instead, by applying an unusual and imprecise choice-of-law
analysis, the court determined that Wisconsin law should determine the
fiduciary duty of corporate officers and directors to corporate
creditors. The result can be justified under the circumstances of the
case, but the decision will most likely lead to forum shopping, less
certainty and predictability, greater litigation costs for parties and
courts, and perhaps retaliatory action when Wisconsin corporations are
sued in other states.
In the future, the court could address these concerns by clarifying
its analysis, particularly its reliance on Wis. Stat. section 180.1704
and on its use of "officious intermeddling" language, and it could set
forth more clearly the narrow circumstances under which Wisconsin law,
rather than the law of the place of incorporation, will govern.
1Resolution Trust Corp. v.
Chapman, 29 F.3d 1120, 1122 (7th Cir. 1994).
22004 WI 39, 270 Wis. 2d 356, 677
3See Brief for
4Beloit Liquidating Trust v.
Grade, 2003 WI App 176, 266 Wis. 2d 388, 669 N.W.2d 232.
5Resolution Trust Corp.,
29 F.3d at 1122.
6Restatement of the Law (2d),
Conflict of Laws § 309 (emphasis added).
7See Wis. Stat.
§§ 179.81, 180.0747.
8Note, The Internal Affairs
Doctrine: Theoretical Justifications and Tentative Explanations for Its
Continued Primacy, 115 Harv. L. Rev. 1480, 1489 (2002).
9Restatement of the Law (2d),
Conflict of Laws § 302.
102003 WI App 176, ¶ 1 n.1,
266 Wis. 2d 388.
11 Beloit, 2004 WI 39,
270 Wis. 2d 356. Justice Prosser did not participate.
12Id. ¶ 23.
13See Shirley A.
Wiegand, Officious Intermeddling, Interloping Chauvinism,
Restatement (Second), and Leflar: Wisconsin's Choice of Law Melting
Pot, 81 Marq. L. Rev. 761 (1998), analyzing Home Ins. v.
Dick, 281 U.S. 397 (1930), Allstate Ins. Co. v. Hague, 449
U.S. 302 (1981), and Phillips v. Shutts, 472 U.S. 797
14Hunker v. Royal Indemnity
Co., 57 Wis. 2d 588, 204 N.W.2d 897 (1973).
supra note 13, at 792-93.
16Finch v. Southside
Lincoln-Mercury Inc., 2004 WI App 110, 274 Wis. 2d 719, 685 N.W.2d