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    Wisconsin Lawyer
    October 07, 2010

    Supreme Court Digest

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

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

    Wisconsin LawyerWisconsin Lawyer
    Vol. 83, No. 10, October 2010

    Creditor-debtor law

    Wis. Stat. Chapter 128 Insolvency Proceedings – Property of Debtor’s Estate – Proceeds of Standby Letters of Credit

    Admanco Inc. v. 700 Stanton Drive LLC, 2010 WI 76 (filed 13 July 2010)

    Drawdowns on standby letters of credit were at the heart of the dispute in this case. There are two general types of letters of credit: those that serve the sale of commodities and those that guarantee the performance of an obligation. The former are called commercial letters of credit, and the latter are known as standby letters of credit (see ¶ 18). “There are three parties to a standby letter of credit: (1) the applicant who requests the letter of credit; (2) the beneficiary to whom payment is due upon the presentation of documents required by the letter of credit; and (3) the issuer who obligates itself to honor the letter of credit by paying up to a stated amount of money when it is presented with documents the letter of credit requires” (¶ 21).

    As explained by the court, all parties to a letter of credit benefit from its use. “The applicant uses the letter of credit as a financial inducement to the beneficiary of the letter of credit to enter into a business arrangement, such as a long-term lease, that the beneficiary would not enter into without this inducement. The issuer receives a fee for the risk it takes, and usually, it also contracts for its security from the applicant or others, in the event the issuer is required to honor the letter of credit. The beneficiary of a letter of credit obtains the gold standard of payment assurance for commercial transactions” (¶ 25) (footnotes omitted).

    In March 2004, 700 Stanton Drive LLC and Admanco Inc. entered into a sale-leaseback arrangement, under which Stanton paid Admanco $2.8 million for a building Admanco owned and entered into a 15-year leaseback of the building to Admanco. The written lease required Admanco to provide Stanton a security deposit of $61,313.66 and to obtain for Stanton’s benefit two letters of credit, each in the amount of $375,000. Admanco applied for one of the letters of credit, and Adman-co’s major shareholders applied for the other letter of credit. Both letters of credit were issued by M&I Bank. The letters of credit were “irrevocable standby letters of credit” that were payable on presentation of documents listed on the face of the letters of credit. M&I Bank was fully secured by Ad-manco’s property in the event there was a drawdown on the letters of credit.

    Admanco encountered financial difficulties, and on Dec. 30, 2004, it assigned its assets to Polsky for the benefit of creditors pursuant to Wis. Stat. section 128.05. On the same date, Polsky was appointed receiver for Admanco’s property pursuant to section 128.08. Admanco failed to make its Jan. 1, 2005, rent payment, and Stanton gave notice of default and the opportunity to cure according to the parties’ lease. On Jan. 10, 2005, after Admanco failed to cure, Stanton gave notice that it was accelerating the full amount due under the lease without terminating the lease (citing a specific section of the lease). Stanton then drew down the full $750,000 from both letters of credit. Stanton also gave notice that it was retaining Admanco’s $61,313.66 security deposit.

    As part of the chapter 128 proceedings, and with M&I Bank’s approval, Polsky applied for and was given permission from the court to sell Admanco’s assets. From the sale of those assets M&I Bank was paid more than $3 million, which included full reimbursement for the $750,000 payment M&I Bank made to Stanton.

    Polsky brought suit against Stanton on behalf of the debtor’s estate, claiming the estate had the right to recoup $811,313.66, which Polsky claimed was the amount of excess lease payments to Stanton. This amount included the $750,000 drawdown on the letters of credit and Stanton’s retention of the $61,313.66 security deposit. Among the issues before the supreme court in this case was the question of whether the proceeds of the standby letters of credit were property of the debtor’s estate and subject to the receiver’s administration under chapter 128. Polsky contended that the proceeds became subject to administration when M&I Bank was reimbursed from the estate’s property.

    In a decision authored by Justice Roggensack, the court concluded that the proceeds of the standby letters of credit were not property of Admanco and thus were not property of the debtor’s estate subject to the receiver’s administration (see ¶ 64). Said the court, “[w]e agree that the proceeds of standby letters of credit are not property of the debtor’s estate. Rather, the proceeds are property of the issuer that are paid to the beneficiary upon a proper demand. They never have been property of the debtor” (¶ 38).

    The supreme court also addressed the meaning of claims in the context of chapter 128 proceedings; this was significant in this case because section 128.17(2) places a cap on “lessor’s claim[s]” (limiting them to past-due rent and other specified actual damages). The lower courts in this case had used this provision to preclude Stanton retaining the proceeds of the letters of credit; the supreme court disagreed. “The ‘claims’ that are filed in a ch. 128 proceeding are claims to receive a distribution from the debtor’s estate” (¶ 44). Such claims seek payment from the property that comprises the debtor’s estate. “Recognizing that ch. 128 claims are claims to share in the debtor’s estate is important because the proceeds of the letters of credit are not property of the debtor’s estate” (¶ 48).

    “Even though the proceeds of a letter of credit are not the property of the debtor’s estate and the drawdowns on the letters of credit are not claims against the debtor’s estate, it does not follow that a receiver can make no claim that the beneficiary drew down more proceeds than it was contractually entitled [to]. Payment from a standby letter of credit does not negate any suit for breach of contract against the beneficiary of a letter of credit, if such a claim exists” (¶¶ 51–52). The court explained that “[r]ecognizing that the proceeds of a standby letter of credit is not part of the debtor’s estate, while permitting a suit on the debtor’s behalf against the beneficiary of a standby letter of credit for breach of contract[,] is an important distinction to maintain. That distinction preserves the ability of a standby letter of credit to shift the risk of nonpayment and insolvency to the issuer of the letter of credit, thereby facilitating commercial transactions. However, it also permits a debtor’s receiver to collect all of the property of the debtor, including damages arising from breach of contract actions” (¶ 54).

    Neither Chief Justice Abrahamson nor Justice Ziegler participated in this case. Justice Crooks filed a dissenting opinion that was joined in by Justice Bradley.

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    Criminal Procedure

    Search and Seizure – Consent Searches – Attenuation Analysis

    State v. Artic, 2010 WI 83 (filed 15 July 2010)

    Police officers conducting a narcotics investigation arrested Artic’s son after he was found in possession of cocaine after exiting Artic’s house. They then planned to secure the premises and obtain a search warrant. Before obtaining a warrant, two officers, Wagner and Lopez, went to the front door to perform a “knock and talk” to determine if anyone was in the house; meanwhile a detective, Davila, went to the rear of the house to ensure that no one attempted to escape. Davila walked through a fenced-in back yard to a door at the rear of the house. From that position she heard what sounded like people scurrying up and down the stairs inside the house. She relayed this information to Wagner and Lopez, who decided to forcibly enter the building. The first-floor premises appeared to be under renovation and so Wagner proceeded upstairs, where he encountered a closed door. He knocked on the door and announced his identity. After a short delay, Artic (the defendant) answered the door and ultimately gave what the state contended was consent to search the upstairs premises. (The record demonstrates that the defendant’s upstairs unit was separate from the downstairs unit and the upstairs unit was his current residence; two other people lived downstairs. He told the officers that he owned the building and was converting it from a duplex into a single-family residence.) As a result of evidence uncovered during the search of the upstairs premises, the defendant was charged with maintaining a drug trafficking place and possession with intent to deliver cocaine.

    The jury convicted the defendant, and he brought a postconviction motion alleging that his trial counsel was ineffective for failing to preserve the argument that the police manufactured exigent circumstances to enter the defendant’s house without a warrant and for failing to object to testimony by Davila about observations she made while she was in the back yard. The circuit court denied this motion. In a published decision, the court of appeals affirmed. See 2009 WI App 12. In a majority decision authored by Justice Prosser, the supreme court affirmed.

    First, the court concluded that the defendant voluntarily consented to the search of his residence. Using a totality of the circumstances approach, it found that 1) the officers did not use deception, trickery, or misrepresentation to obtain consent; 2) they did not use coercive tactics (a officer’s weapon that was drawn when the upstairs door was opened was promptly holstered); 3) conditions at the time consent was given were nonthreatening and cooperative; 4) the defendant’s oral consent to search was not vitiated by his refusal to sign a written consent form; and 5) there was no evidence that the defendant was particularly susceptible to duress or intimidation (he was 60 years old, had a GED, had owned a business and rental properties, and had a prior drug conviction and was on extended supervision). It is true that the officers did not tell the defendant that he could refuse consent; this factor weighed against a finding of voluntariness but “it does not weigh heavily into our consideration of the totality of the circumstances” (¶ 61).

    Assuming that the initial warrantless entry of the building was illegal, the court next addressed whether the search of the upstairs residence was sufficiently attenuated from the illegal entry to purge the taint of that illegal entry. The court concluded that it was, after applying a three-factor analysis that considered 1) the temporal proximity between the entry and the giving of consent to search, 2) the presence of intervening circumstances and, particularly, 3) the purpose and flagrancy of the official misconduct (see ¶ 66). Though no more than five minutes elapsed between the illegal entry and the giving of consent, this shortness of time was “mitigated by the congenial and non-threatening conditions at the time of consent” (¶ 78).

    Further, the record demonstrated the existence of meaningful intervening circumstances following the illegal entry on the ground floor (for example, the consensual opening of the door to the second floor by the defendant, the accommodations made by the officers in waiting for a woman on the premises to get dressed before they engaged in conversation with the defendant, the two-sided nature of the conversation with the defendant regarding his son’s drug activity, and the officer’s decision to knock and announce at the upstairs door).

    As for the third factor listed above, the court began its analysis by noting that the officers entered the house based on their belief that exigent circumstances existed. Their belief in exigent circumstances was based, in turn, on observations that Davila had made from within the curtilage of Artic’s residence. Said the court, “[Officer] Wagner testified that the officers’ forced entry was based upon their belief that evidence was being destroyed, and nothing in the record suggests that this belief was not genuine. The fact that Davila’s observations were made unlawfully from within the curtilage rendered the officers’ subsequent entry illegal, but it did not make the entry purposeful or flagrant for the purposes of attenuation analysis” (¶ 99). Any flagrancy in the officer’s conduct was mitigated by the fact that the forced entry was into the building generally – not into the defendant’s living quarters (see ¶ 103). Accordingly, the majority concluded that the police search of the upper-level residence was sufficiently attenuated from the illegal entry to purge the primary taint of that entry (see ¶ 106).

    For these reasons, the defendant was not prejudiced by his counsel’s failure in the suppression motion to raise the argument that the police created their own exigent circumstances and to object to testimony about observations made illegally from within the curtilage of the defendant’s house (see id.).

    Chief Justice Abrahamson filed a dissenting opinion that was joined in by Justice Bradley.

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    Sentencing – Credit for Time in Custody Before Sentencing

    State v. Carter, 2010 WI 77 (filed 14 July 2010)

    This case concerns the award of sentence credit for the time a criminal defendant spends in jail while awaiting trial and sentencing. The statutory provision at issue is mandatory; it provides that “[a] convicted offender shall be given credit toward the service of his or her sentence for all days spent in custody in connection with the course of conduct for which sentence was imposed.” See Wis. Stat. § 973.155(1)(a).

    The defendant entered a guilty plea to a charge of first-degree recklessly endangering safety in Wisconsin. The sentence for this crime was imposed to run concurrently with a sentence previously imposed in Illinois for an unrelated armed robbery. Before his guilty plea, conviction, and sentencing on the Wisconsin crime, the defendant was in presentence custody in Illinois from the time of his arrest in Illinois (Dec. 13, 2003) until his sentencing on the Illinois armed robbery charge (Oct. 19, 2004). In the present litigation, he sought credit against his Wisconsin sentence for this presentence time.

    In a majority opinion authored by Chief Justice Abrahamson, the supreme court agreed with the defendant that he is entitled to credit against his Wisconsin sentence for the time specified above (except for six days in December 2003 when he was serving time on an Illinois impaired-driving conviction). His original arrest, on Dec. 13, 2003, was based on an outstanding Wisconsin felony warrant for recklessly endangering safety as well as on an Illinois probation-violation warrant. From that date until Oct. 19, 2004, when he was sentenced on the Illinois robbery (for which he had been arrested on Dec. 19, 2003), the defendant was in custody in part because of the Wisconsin warrant issued in this case (see ¶ 79). There was thus the kind of factual connection between the custody and the conduct for which the Wisconsin sentence was imposed that requires the award of presentence credit (except for the six days noted above). See State v. Johnson, 2009 WI 57, 318 Wis. 2d 21, 767 N.W.2d 207. (The defendant refused to waive extradition to Wisconsin, and Wisconsin accordingly initiated the extradition process; however, the defendant was not released to Wisconsin until after he had begun serving his Illinois sentence.)

    Justice Gableman joined the majority opinion but authored a separate concurrence. Justice Roggensack filed an opinion concurring in part and dissenting in part. Justice Prosser and Justice Ziegler filed dissenting opinions.

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    Employment Law

    Termination of In-house Counsel – Validity of Arbitration Award Ordering Reinstatement

    Sands v. Menard Inc., 2010 WI 96 (filed 21 July 2010)

    Sands was terminated from her position as vice president and executive general counsel of Menard Inc. She claimed that she had been defamed by Menard and was the victim of sex discrimination and then retaliation for claiming discrimination. Sands and Menard initially attempted to settle their dispute independently, but this proved unsuccessful. They then agreed to enter into binding arbitration.

    The arbitration panel rejected Sands’s defamation and Title VII pay discrimination claims, but it found that Sands 1) was the victim of pay discrimination under the Equal Pay Act (EPA) because of Menard’s failure to compensate her on par with the former general counsel (a man), and 2) was discharged in retaliation for her assertion of her statutory rights to be free from pay discrimination in violation of the EPA, Title VII, and the Wisconsin Fair Employment Act. The panel awarded Sands various monetary damages. It also ordered her reinstated to her former position at Menard. (During the arbitration hearings, Sands did not request to be reinstated to her position at Menard but instead sought two years of front pay. Front pay is “compensation projected for future earnings” (¶ 35).)

    Menard prepared a check for the full amount of the panel’s monetary award but refused to reinstate Sands. Sands filed suit in circuit court seeking to clarify the arbitration award and to confirm it. The circuit court confirmed the arbitration award in its entirety. In a published decision, the court of appeals affirmed. See 2009 WI App 70. In a majority opinion authored by Justice Gableman, the supreme court reversed the court of appeals.

    The majority agreed with Menard that the arbitration panel exceeded its authority when it ordered Sands’s reinstatement. “An arbitration panel exceeds its authority when its award violates strong public policy. An attorney owes a fiduciary duty of loyalty to her clients, a duty so replete in our cases and in the Rules of Professional Conduct as to be axiomatic. Such a duty is deeply rooted in our laws and embodies the strong public policy of the State of Wisconsin. In this case, we conclude that by accepting reinstatement, Sands would be forced to violate her ethical obligations as an attorney” (¶ 70).

    Before and throughout the arbitration process, all parties agreed that their relationship was irretrievably broken. “Sands understood this and unequivocally testified against reinstatement before the arbitration panel, even going so far as to state that ‘no reasonable person would entertain reinstatement as a possibility’” (¶ 57). The supreme court agreed, stating that “[t]rust has been completely broken; nothing good could possibly come from reinstatement. In view of this especially bitter litigation marked by personal and professional animosity, we see no way Sands could now return to Menard and serve the company in conformity with her ethical obligations” (¶ 59). The situation was exacerbated by the fact that Sands performed an unusually high-level and sensitive role at Menard, directing all in-house legal operations and also serving as Menard’s spokesperson and public representative to the community (see ¶ 60).

    Accordingly, the court vacated the panel’s reinstatement award on the ground that it is void as a violation of strong public policy. “Under the applicable employment discrimination laws, front pay is a substitute for reinstatement. Accordingly, we vacate the panel’s award of reinstatement and remand to the circuit court to determine an appropriate award of front pay” (¶ 70).

    Chief Justice Abrahamson filed a dissenting opinion that was joined in by Justice Bradley and Justice Crooks.  

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