Vol. 82, No. 6, June 2009
Fiduciary Duty – Derivative Actions
Notz v. Smith Group Ltd., 2009 WI 30 (filed 29 Apr. 2009)
A minority shareholder of a corporation, Notz, sued the corporation (ATS) and others because of various transactions that culminated in the acquisition of two companies. Notz claimed that the acquisitions constituted a breach of the defendants’ fiduciary duties. “The allegations are that the Smith Group, as ATS’s majority shareholder, rejected the opportunity ATS had to buy Dickten & Masch; the Smith Group subsequently bought Dickten & Masch itself; and the Smith Group, in its capacity as majority shareholder, orchestrated the sale of ATS’s valuable plastics group, Trostel SEG, to its own new acquisition” (¶ 17). The circuit court dismissed Notz’s claims for breach of fiduciary duty because the alleged harm was common to all shareholders and created no direct injury to Notz. The court of appeals affirmed, although it “carved out a portion of the claim,” holding that ATS’s due diligence expenses constituted a constructive dividend to the Smith Group, which ultimately acquired the companies. See 2008 WI App 84.
The supreme court affirmed in part and reversed in part in an opinion authored by Justice Crooks. First, the court agreed that the acts alleged by Notz gave rise to a derivative action but not to a breach of a fiduciary duty to Notz. “To hold otherwise would mean … that ‘there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation.’ Rose [v. Schantz,] 56 Wis. 2d [222,] 230[, 201 N.W.2d 593 (1972)]. The situation here involves, as the circuit court noted, ‘the majority’s power to sell a part of a company to an entity that it has a hundred percent interest in … [a]t a fair price.’ Such a transaction may give rise to a derivative claim for injury that is primarily to the corporation; under Rose, that is the only claim available” (¶ 23).
Second, the supreme court agreed that Notz could pursue his due diligence claim because it differed from the fiduciary claim. “Here, cash that was part of the corporation’s assets [that] could have been used to pay dividends was instead diverted to fund due diligence for a company that the majority shareholder later acquired” (¶ 28).
Finally, the supreme court reversed the court of appeals’ dismissal of the judicial dissolution claim, which dismissal was based on the later mergers that occurred while the appeal was pending. “The language of the statute is remarkably clear and is cast in the broadest of terms: ‘A civil, criminal, administrative, or investigatory proceeding pending by or against any business entity that is a party to the merger may be continued as if the merger did not occur, or the surviving business entity may be substituted in the proceeding for the business entity whose existence ceased.’ Wis. Stat. § 180.1106(1)(d) (emphasis added). In applying the text of the statute to the facts in the instant case, it is important to note that the civil proceeding instituted by Notz was pending at the time of the merger. The statute could hardly be written more explicitly to preserve such a claim: ‘as if the merger did not occur.’ If the merger did not occur, Notz would not have been forced out as a shareholder, and the claim would continue” (¶ 37).
Justice Roggensack, joined by Justice Gableman, concurred. They wrote separately to address the effect of pending federal civil litigation on Notz’s dissolution claim (see ¶ 44).
Justice Bradley, joined by Chief Justice Abrahamson, concurred in part and dissented in part. Underscoring that the case law provides “scant guidance for determining whether an injury is primarily to the shareholder or primarily to the corporation[,]” the dissenting justices concluded that the majority simply “splits the difference” in an admittedly “difficult case” (¶¶ 65-66). They found that the injury underlying the first claim was “unique” and thus constituted a breach of a fiduciary duty, as did the due diligence claim (see ¶ 88).
Justice Ziegler did not participate in this decision.
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Search Warrants – Probable Cause
State v. Romero, 2009 WI 32 (filed 7 May 2009)
Police officers executed a search warrant at Romero’s home and found evidence of drug dealing. The circuit court denied Romero’s motion to suppress the evidence as unlawfully seized, and Romero was convicted of drug trafficking. The court of appeals reversed the conviction, concluding that the underlying affidavits did not establish the probable cause necessary for the search warrant.
The supreme court reversed the court of appeals in a decision written by Chief Justice Abrahamson. “The single issue on review is whether probable cause existed for issuance of the warrant to search the defendant’s residence when the affidavit in support of the search warrant was based in part on statements of an unnamed participant in a police sting. We refer to this participant as Mr. X for ease of discussion. Mr. X is quoted in the affidavit as saying that the cocaine he furnished to a confidential informant (who was cooperating with the police) was supplied by the defendant” (¶ 2). Under the totality of the circumstances test, the “warrant-issuing commissioner” properly found that probable cause supported the search warrant (see ¶ 4).
The issue concerned not only whether Mr. X had personal knowledge but also Mr. X’s “veracity” itself (that is, why he could be trusted). “It would make little sense for the veracity of a declarant or the basis of the declarant’s knowledge to be relevant to the probable cause determination when law enforcement officers obtain information directly from the declarant yet not relevant to the probable cause determination when officers obtain information from the declarant indirectly through another declarant. The extent to which a search warrant’s supporting affidavit must demonstrate the veracity and basis of knowledge of a declarant may vary depending on the circumstances specific to each case” (¶ 23). The court pointedly rejected the state’s suggestion, based on prior case law, that it adopt a bright-line rule that eliminated the need to “validate” declarants when seeking search warrant affidavits. Although the affidavit was “heavily dependent upon the veracity of Mr. X” (¶ 32), it passed muster. Some of the information was corroborated (see ¶ 35), and other statements were sufficiently against Mr. X’s penal interest (see ¶ 36) and betrayed no motive to falsify (see ¶ 38). Significantly, Mr. X’s statements were made to an informant, not to police officers in an effort to curry favor.
Justice Roggensack, joined by Justices Ziegler and Gableman, concurred but wrote separately for two reasons: “(1) … [T]he majority opinion could be read, mistakenly, as reestablishing a rigid two-prong test for evaluating the sufficiency of the allegations in a warrant affidavit, similar to the test employed in Aguilar v. Texas, 378 U.S. 108 (1964). [The Court set aside Aguilar in Illinois v. Gates, 462 U.S. 213 (1983)] . ... (2) … [T]he majority opinion could be read, mistakenly, as requiring a determination of the veracity, i.e., truthfulness, of a person who is not a known confidential informant, here Mr. X, rather than assessing the reliability of Mr. X’s statements through a common sense interpretation of the record before the magistrate”
Restitution – Amount Not Limited to What Can Be Paid during Sentence Term
State v. Fernandez, 2009 WI 29 (filed 28 Apr. 2009)
The restitution award in this case stemmed from damage and injuries the defendant caused after he became intoxicated at a friend’s party, stole a car, and drove through a railyard. A railyard worker, Bruce Dalka, had to dive out of the car’s path and in the process twisted his knee. Dalka needed months of medical care and incurred lost wages. The stolen car was also damaged.
The defendant pleaded no contest to taking and driving a vehicle without consent in violation of Wis. Stat. section 943.23(2). The circuit court withheld sentence and placed the defendant on probation for two years. Probation conditions included payment of restitution, with the amount to be determined at a separate hearing held later at the request of defense counsel. Following that hearing the court ordered the defendant to pay all the restitution requested by two insurers, the car owner, and Dalka, for a total of $68,794.27 (most of which related to Dalka’s physical injuries) with payments set at $400 per month. The conviction noted that if any restitution remained unpaid at the end of the probation term, “a civil judgment shall be entered for the balance due and/or other collection procedures will be implemented” (¶ 11). The defendant also pleaded no contest to operating while intoxicated/causing injury in violation of Wis. Stat. section 346.63(2)(a)1. On that charge he was sentenced to 60 days in jail, a year-long license revocation, a fine, and court costs (see ¶ 10 n.8). [Editors’ Note: The defendant did not contest his ability to make the $400 monthly payments (see ¶ 15), and the issues he raised on this appeal did not include a challenge relating to his ability to pay the overall amount of restitution (see id. n.13).]
The supreme court accepted this appeal on certification from the court of appeals. The court of appeals asked the high court to determine “whether State v. Loutsch, 2003 WI App 16, ¶ 25, 259 Wis. 2d 901, 656 N.W.2d 781 …, correctly interprets the criminal restitution statute when it states that a court may order only as much restitution as a defendant has the ability to pay within the term of the sentence” (¶ 1). In a majority decision authored by Justice Crooks, the supreme court answered the certified question “by holding that when a court has considered the defendant’s ability to pay in setting restitution, the length of the term of probation or of the sentence does not have any limiting effect on the total amount of restitution that may be ordered” (¶ 2). The court specifically overruled the portion of Loutsch that has been interpreted as limiting restitution to the amount that can be paid during the sentence or probation period (see ¶ 5).
Also at issue was the timing of the restitution hearing. Although the circuit court scheduled the hearing within the 60-day time period specified in Wis. Stat. section 973.20(13)(c)2, it was not actually conducted within that time. The supreme court concluded that the court of appeals was correct when it held in State v. Perry, 181 Wis. 2d 43, 510 N.W.2d 722 (Ct. App. 1993), that the timelines in the statute are “directory” instead of mandatory (see ¶ 56). “[The defendant] has shown no injury from the fact that the restitution hearing was held outside of the time period considering that the delay of the restitution hearing was done at his own request for the purpose of allowing him to validate a claim of restitution. The circuit court explicitly noted that it made the decision to permit the restitution hearing to be adjourned ‘in fairness.’ It is clear from the record that the delay in scheduling the requested adjournment was caused by understandable court calendaring issues, and it is equally clear that [the defendant] was not injured by the delay he sought here, except that when he asked for the additional time, he opened the door for additional claims to be submitted before the hearing concluded” (¶ 57).
The supreme court also rejected the defendant’s argument that the circuit court erred in considering restitution claims submitted by Dalka and his insurer after sentencing but before the restitution hearing. “There is no language in the statute that prohibits the consideration of claims presented before the restitution hearing occurred, which is when Dalka’s and CNR’s claims were presented. Where, as here, [the defendant] had notice of Dalka’s injuries (and therefore of those of his insurer, CNR) because [he] knew that Dalka had been hurt, there was no expectation of finality at a sentencing hearing when restitution was ordered in an amount to be determined. Even if [the defendant] somehow was unaware of the injuries on the night of the crash, the complaint included information on Dalka’s being taken by ambulance to the hospital and being told by a doctor that he had torn ligaments in his left knee” (¶ 54).
Lastly, the defendant argued that the circuit court erred by ordering full restitution to two insurance companies because a court is authorized to order such restitution only in situations in which justice so requires. He contended that “justice does not require a man who washes dishes for a living to reimburse insurance companies worth billions of dollars” (¶ 61). The supreme court responded that “[t]here is no evidence that the court applied the wrong legal standard or did not ground its decision on a logical interpretation of the facts when it decided justice required reimbursing an insurer who has compensated a victim for a loss” (¶ 62).
Justice Bradley, joined by Chief Justice Abrahamson, filed a dissenting opinion in which she said that “there was no application whatsoever of the ‘if justice so requires’ standard” (¶ 66) when the court awarded restitution to the insurance companies.
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Juror Bias – Judge’s Family
State v. Tody, 2009 WI 31 (filed 30 Apr. 2009)
A jury convicted Tody of operating a vehicle without the owner’s consent. In an opinion authored by Chief Justice Abrahamson, the supreme court reversed the conviction because one of the jurors was the trial judge’s mother. “A presiding judge’s mother serving as a juror is a special circumstance so fraught with the possibility of bias that we must find objective bias regardless of the particular juror’s assurances of impartiality” (¶ 5). Here the trial judge strongly leaned toward excluding his mother from the jury panel but concluded that he lacked the authority to do so. The supreme court held that the judge was wrong.
Bias more typically arises from a juror’s relationship to a party, but the circumstances here also created objective bias. “The judge’s mother has an interest in the case, namely her familial relationship with the judge, that is extraneous to the evidence on which the jury is to base its decision. A reasonable person in the position of the judge’s mother would not have been able to set aside her relationship to the presiding judge when discharging her duties as a juror” (¶ 38). For example, her presence may have chilled counsels’ duty to challenge the judge’s rulings with “ordinary zeal” (¶ 39). Moreover, the “presence of a member of the judge’s immediate family on the jury seems conspicuously inconsistent with the jury’s function as, in part, a check upon the power of the judge” (¶ 40). Finally, the error was per se prejudicial and necessitated a new trial. In guarding against future mishaps, the supreme court reasserted that “[t]he obligation to avoid a biased juror lies not only with defense counsel and the circuit court, but also ... with the prosecutor” (¶ 48).
Justice Ziegler, joined by Justices Prosser and Roggensack, concurred. Refusing to “pigeon hole” this case as one of “objective bias,” Justice Ziegler nonetheless concluded that “the judge should have either stricken his mother from the jury or recused himself from the case” (¶ 67).
Justice Prosser concurred separately to emphasize that he could not join an opinion “that seeks to transform a questionable example of ‘objective bias’ into a per se violation of the Sixth Amendment” (¶ 55).
Justice Gableman did not participate in this decision.
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