Successor Liability – Exceptions – Fraudulent Transactions
Veritas Steel LLC v. Lunda Constr. Co., 2020 WI 3 (filed 15 Jan. 2020)
HOLDING: Successor liability rules barred claims brought by an unsecured creditor; the plaintiff waived its “fraudulent transfer” argument by not raising it before the court of appeals.
SUMMARY: This case involves a lawsuit brought by an unsecured creditor, Lunda Construction, against a debtor’s corporate successor. The debtor was PDM, a steel fabricator, which defaulted to secured creditors on its loans. PDM also breached its contract with Lunda to provide steel for a bridge construction project. Lunda eventually obtained a $16 million judgment against PDM and sought liens on state funds owed to PDM for various projects.
By that time, another entity, Veritas Steel, owned PDM’s assets. Atlas, a private equity firm, had created Veritas to carry out a strict foreclosure by which Veritas was assigned a first priority lien on PDM’s assets and thereafter became the sole secured lender under a credit agreement. PDM conveyed to Veritas all collateral securing the loan in exchange for the discharge of $71 million (of $76 million) in secured debt. The foreclosure agreement did not change PDM’s ownership or board structure nor was any stock or other equitable ownership transferred from Veritas to PDM (see ¶ 10).
Veritas began this declaratory action against Lunda to establish that Lunda had no claim to the payments owed by the state. Lunda filed counterclaims. The circuit court granted summary judgment in favor of Veritas on claims grounded in successor liability and another under the Wisconsin Uniform Fraudulent Transfer Act (WUFTA). In an unpublished opinion, the court of appeals affirmed both rulings.
The Wisconsin Supreme Court affirmed in a majority opinion authored by Justice Dallet. “It is well established that when a company sells or transfers all of its assets to another company, the purchasing company does not become liable for the transferring company’s debts and liabilities” (¶ 17).
Of the four exceptions to the rule against successor liability, only two were at issue: 1) the de facto merger exception, and 2) the mere continuation exception. Case law “made clear, the de facto and mere continuation exceptions to the rule against successor liability require evidence of identity of ownership. For the de facto merger exception, identity of ownership hinges on whether ‘the transfer of ownership was for stock in the successor corporation rather than cash’” (¶ 28). “Equity ownership” also might suffice (id.).
As to the mere continuation exception, identity of ownership is established when there “‘is a common identity of the officers, directors and stockholders in the selling and purchasing corporations’” (¶ 29). The court rebuffed Lunda’s contention that later cases had “significantly expanded” these exceptions by permitting “identity of management” and control to substitute for the “ownership” element. “Identity of ownership remains the sine qua non of successor liability” (¶ 31). The summary-judgment record revealed no genuine issue of material facts on this point (see ¶ 35).
Lunda also raised a claim sounding in the “fraudulent transaction exception to the rule against successor liability.” The court held, however, that Lunda forfeited this argument by failing to raise it before the court of appeals (¶ 38).
Chief Justice Roggensack did not join the majority opinion but did concur. Her opinion focuses on Lunda’s allegations of fraud, which she found misplaced on these facts. Wis. Stat. ch. 409 “was created in part to do exactly what happened here” (¶ 79). “Atlas lawfully removed PDM’s assets from Lunda’s reach by the actions it and its affiliates took, which actions culminated in strict foreclosure that prevented Lunda’s claims from reaching Veritas’s assets” (¶ 81).
Sentencing – Right of Defendant to Be Sentenced on Accurate Information – Harmless Error
State v. Coffee, 2020 WI 1 (filed 9 Jan. 2020)
HOLDING: The circuit court’s reliance on inaccurate sentencing information was harmless error.
Prof. Daniel D. Blinka, U.W. 1978, is a professor of law at Marquette University Law School, Milwaukee.
Prof. Thomas J. Hammer, Marquette 1975, is a law professor and Director of Clinical Education at Marquette University Law School, Milwaukee.
SUMMARY: The defendant pleaded guilty to charges of armed robbery, attempted armed robbery, and first-degree recklessly endangering safety. At the sentencing hearing the prosecutor told the court that the defendant had been arrested in December 2011 for armed robbery. This was inaccurate. He had been arrested not for armed robbery but on suspicion of strong-arm robbery, and he was then released; the state never filed any charges against the defendant for the strong-arm robbery. Thus, the state introduced inaccurate information at the sentencing hearing, and the parties agreed that the circuit court actually relied on the inaccurate information when it sentenced the defendant.
The circuit court denied postconviction relief to the defendant, holding that although the court considered the erroneous information at sentencing, the error was harmless. In an unpublished opinion, the court of appeals affirmed; it concluded that the defendant forfeited the claim of error by failing to object to the erroneous information during the sentencing hearing.
There were two issues before the supreme court: 1) whether the defendant forfeited his ability to later challenge the inaccurate information because he failed to object at the sentencing hearing; and 2) if he did not forfeit his claim, whether the circuit court’s reliance on the inaccurate information at sentencing was harmless error (see ¶ 2). The supreme court affirmed the court of appeals. However, there was a majority opinion only with respect to the harmless-error issue.
Beginning with the forfeiture issue, Justice Ziegler’s lead opinion (joined in by Chief Justice Roggensack and Justice Hagedorn) concluded that the defendant did not forfeit his claim of inaccurate information at sentencing. “[W]e conclude that the forfeiture rule does not apply to previously unknown, inaccurate information first raised by the State at sentencing. Rather, while an objection may be the best practice, a postconviction motion is also a timely manner in which to assert that claim” (¶ 31).
The three dissenting justices in this case (Justice A.W. Bradley, Justice R.G. Bradley, and Justice Dallet) also agreed with the lead opinion on the resolution of the forfeiture issue (see ¶ 70). However, as explained by the dissenters, the positions of justices who dissent from the judgment are not counted in examining the divided opinions for holdings (see id. n.1).
Justice Ziegler delivered a majority opinion for the court with respect to the harmless-error issue. To obtain resentencing based on inaccurate sentencing information, the defendant must show by clear and convincing evidence that some information at the original sentencing was inaccurate and that the circuit court actually relied on the inaccurate information at sentencing. “A circuit court actually relies on incorrect information when it gives ‘explicit attention’ or ‘specific consideration’ to it, so that the misinformation ‘formed part of the basis for the sentence’” (¶ 38) (internal quotations and citation omitted). If the defendant meets this burden, then the burden shifts to the state to prove beyond a reasonable doubt that the error was harmless. The state can meet its burden by demonstrating that the sentencing court would have imposed the same sentence absent the error (see id.).
In this case the record was clear that the state introduced inaccurate information at sentencing; the defendant was not arrested for armed robbery in December 2011. The record is also clear that the circuit court actually relied on the armed robbery arrest at the sentencing hearing, referencing it twice.
Nonetheless, the majority concluded that the error was harmless. It agreed with the state that regardless of whether the defendant had a prior arrest for armed robbery, the court’s statements at sentencing were accurate insofar as they indicated a concern that the defendant’s pattern of undesirable behavior was escalating (an accurate statement given the defendant’s prior-misdemeanor record) and a concern that his prior police contacts did not cause the defendant to think about his associations and the choices he was making (see ¶¶ 42-43).
The majority also concluded beyond a reasonable doubt that the sentencing court would have imposed the same sentence absent the inaccurate sentencing information (see ¶ 51). “The sentencing transcript is clear that the circuit court based its sentence on Coffee’s contribution to gun violence in Milwaukee, the harm to the community, the harm to the victims, and Coffee’s need to be removed from the community. It is clear that these factors were not merely other factors that supported Coffee’s sentence, but were the basis of the sentence” (id.).
Justice Kelly filed a concurring opinion that Justice R.G. Bradley joined in part.
Justice A.W. Bradley filed a dissenting opinion that was joined in by Justice R.G. Bradley and Justice Dallet.
Mental Health Law
Chapter 51 Commitments – Dangerousness
Marathon Cty. v. D.K. (In re Condition of D.K.), 2020 WI 8 (filed 4 Feb. 2020)
HOLDINGS: 1) Although it expired in 2017, respondent D.K.’s mental commitment is not a moot issue. 2) There was clear and convincing evidence at the final hearing that D.K. was dangerous as defined by Wis. Stat. section 51.20(1)(a)2.b.
SUMMARY: In April 2017, a law enforcement officer arrested D.K. and filed a statement of emergency detention. At the final hearing on the matter, in May 2017, the circuit court concluded that the county proved by clear and convincing evidence that D.K. was mentally ill, a proper subject for commitment, and dangerous. The court ordered that D.K. be involuntarily committed for six months. In November 2017, that commitment expired and the county did not seek an extension. On this appeal, D.K. argued that he should not have been committed because the county failed to prove his dangerousness. In an unpublished opinion, the court of appeals affirmed.
The supreme court considered two issues: 1) whether D.K.’s challenge to his commitment order is moot, and 2) whether there was clear and convincing evidence that D.K. was dangerous under Wis. Stat. section 51.20(1)(a)2.b. (see ¶ 2). The justices split in their votes, producing a majority opinion only in part.
With regard to the mootness question, a majority of the court, in an opinion authored by Justice Ziegler, concluded that D.K.’s commitment is not a moot issue, even though it expired in 2017. D.K. is still subject to the lasting collateral consequence of a firearms ban. “Since D.K. would otherwise have a fundamental right to bear arms, this is no minor consequence” (¶ 25).
As for the dangerousness issue, the court noted that it has never before interpreted Wis. Stat. section 51.20(1)(a)2.b., which defines “dangerous.” The statute provides that an individual is dangerous if he or she “[e]vidences a substantial probability of physical harm to other individuals as manifested by evidence of recent homicidal or other violent behavior, or by evidence that others are placed in reasonable fear of violent behavior and serious physical harm to them, as evidenced by a recent overt act, attempt or threat to do serious physical harm.”
In the part of the opinion joined only by Chief Justice Roggensack and Justice Hagedorn, Justice Ziegler concluded that “the plain language of Wis. Stat. § 51.20(1)(a)2.b. requires a showing that it is much more likely than not that the individual will cause physical harm to other individuals. This conclusion can be supported by evidence that at least one person was placed in ‘reasonable fear of violent behavior and serious physical harm’ to that same person or another [or by “evidence of recent homicidal or other violent behavior” but that language was not at issue in this case.] This reasonable fear must be ‘evidenced by’ a ‘recent overt act,’ an ‘attempt,’ or a ‘threat to do serious physical harm’” (¶ 42) (citations omitted).
Justice Ziegler concluded that the testimony of a psychiatrist (who was the county’s only witness and whose testimony is recounted at length in the opinion) and the circuit court’s factual findings established that D.K. was dangerous within the meaning of Wis. Stat. section 51.20(1)(a)2.b. (see ¶ 49). A majority of the court concluded that there was clear and convincing evidence at the final hearing that D.K. was dangerous as defined by the statute.
Justice R.G. Bradley filed a concurring opinion in which she agreed with the majority’s conclusion that there was clear and convincing evidence of D.K.’s dangerousness. However, she wrote separately because of her disagreement with the majority’s methodology of statutory analysis. “Instead of relying exclusively on precedent, the majority should have analyzed and applied the plain meaning of the statutory text” (¶ 57). Justice Kelly joined this concurrence.
Justice Dallet dissented. Though agreeing with the majority’s statutory analysis, she parted ways with the majority as to whether there was clear and convincing evidence presented to the circuit court that D.K. “evidence[d] a substantial probability of physical harm” (¶ 78). Justice A.W. Bradley joined the dissent.
Conversion – Replevin – Statutes of Repose
Mueller v. TL90108 LLC, 2020 WI 7 (filed 4 Feb. 2020)
HOLDING: A claim for replevin based on wrongful detention accrues when the subsequent purchaser obtains the property; no demand is necessary.
SUMMARY: In 2001, unidentified individuals stole a car valued at more than $1 million. The car ended up in Europe, where years later it was purchased by TL90108 (hereinafter TL), an Illinois concern. When TL filed for title in Illinois in 2015, the car was identified as stolen and the successors to the original owner demanded its return. TL declined to return the car, and the successors filed an action for replevin. The circuit court granted TL’s motion to dismiss on grounds that the plaintiffs’ claim was barred by the six-year statutes of repose. In a published decision, the court of appeals reversed, finding that the successors’ demand triggered a wrongful-detention claim. See 2018 WI App 52.
The supreme court affirmed in an opinion authored by Justice Hagedorn. The issue before the court was “whether a wrongful detention claim may exist for previously converted property, and if so, when a replevin cause of action based on a subsequent wrongful detention accrues. We conclude that under the plain language of the statutes of repose and our cases, the true owner can maintain a replevin action for wrongful detention against a subsequent purchaser of converted property. We hold that under Wis. Stat. §§ 893.35 and 893.51(1), a cause of action for replevin based on wrongful detention under facts like those alleged here accrues when the subsequent purchaser obtains the property; no demand is necessary” (¶ 3).
TL’s wrongful detention began when it acquired the car in 2015. The plaintiffs’ claim was filed within the six-year period provided by the statute of repose (see ¶ 25).
Justice Dallet did not participate in this decision.
Economic Loss Doctrine – Misrepresentations
Hinrichs v. Dow Chem. Co., 2020 WI 2 (filed 9 Jan. 2020)
HOLDING: The economic loss doctrine bars the plaintiff’s common-law claims, but his claim of misrepresentation under Wis. Stat. section 100.18 was properly pleaded.
SUMMARY: The plaintiff was in the business of selling aftermarket acrylic skylights for Jeeps. Installation required an adhesive, which the plaintiff purchased from Dow Chemical. In 2013 Dow convinced the plaintiff to use a new product, which turned out to be defective, triggering a loss of business and negative publicity. The plaintiff brought common-law claims against Dow as well as misrepresentation claims under Wis. Stat. section 100.18(1). The circuit court dismissed the claims on Dow’s motion.
In an unpublished decision, the court of appeals affirmed the dismissal of the common-law claims based on the economic loss doctrine but ruled that the Wis. Stat. section 100.18(1) claim could go forward.
The supreme court affirmed the court of appeals in a majority opinion authored by Justice A.W. Bradley. First, the court surveyed the economic loss doctrine and its exceptions for damage to “other property” and for “fraud in the inducement.” The latter exception did not apply “because the alleged misrepresentation is related to the quality and characteristics of the product in question and is thus not extraneous to the contract” (¶ 39). Nor did the other-property exception apply. Dow’s adhesive and the plaintiff’s Jeep tops formed an “integrated system”; the adhesive did “not function on its own” (¶ 46).
Second, the majority held that the Wis. Stat. section 100.18(1) claim could go forward. The majority explicitly reaffirmed Kailin v. Armstrong, 2002 WI App 70, 252 Wis. 2d 676, 643 N.W.2d 132, in which the court of appeals held that the economic loss doctrine does not bar claims under Wis. Stat. section 100.18(1) (see ¶ 55). The court next refused to overrule its “seminal” decision in State v. Automatic Merchandisers of America Inc., 64 Wis. 2d 659, 221 N.W.2d 683 (1974), which applied Wis. Stat. section 100.18(1) to “oral representations made in private conversations to prospective purchasers of the defendants’ products” (¶ 60). Based on this precedent, the court reaffirmed that “one person can be ‘the public’” for purposes of the statute (¶ 70).
Third, claims under Wis. Stat. section 100.18 are not subject to the “heightened pleading standard” for fraud set forth by Wis. Stat. section 802.03(2). This was an issue of first impression (see ¶ 72). Applying a heightened standard would run counter to the purpose of Wis. Stat. section 100.18, which is to protect consumers (see ¶ 78).
Justice R.G. Bradley concurred in part and dissented in part. She agreed with the majority that the economic loss doctrine barred the plaintiff’s common-law claims. She dissented to its holding on Wis. Stat. section 100.18, specifically, the majority’s determination that the plaintiff fell within the statutory term “the public” (¶ 94).