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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