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COURT OF APPEALS
DECISION
DATED AND FILED
May 20, 2004
Cornelia G. Clark
Clerk of Court of Appeals
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NOTICE
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This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official
Reports.
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See Wis. Stat. § 808.10 and Rule 809.62.
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Appeal No.
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02-2618
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STATE OF WISCONSIN
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IN COURT OF
APPEALS
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James A. Finch and Tricia K.
Finch,
Plaintiffs-Appellants,
v.
Southside Lincoln-Mercury,
Inc.,
Defendant,
Ford Motor Company, R. G.
Singletary, S. D.
Majercik and S. L. Griffin,
Defendants-Respondents.
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APPEAL
from an order of the circuit court for La Crosse County: michael j.
mulroy, Judge. Affirmed in part; reversed in part and
cause remanded with directions.
Before Deininger, P.J., Dykman and Vergeront, JJ.
¶1 DEININGER, P.J. James and Tricia Finch
appeal the dismissal of their claims against Ford Motor Company and three of
its employees who served as directors of Southside Lincoln-Mercury, Inc. The trial court concluded that certain language
in the lease between the Finches and Southside absolved Ford, Southside’s
controlling shareholder, and the three directors from any liability for the
Finches’ claims against them. The
Finches contend that the court erred in dismissing their claims because the
clause at issue did not bar their claims for breach of fiduciary duty, tortious
interference with a contract, and violation of the Uniform Fraudulent Transfer
Act, and that each of these claims was well pled in their amended
complaint. We agree that the last two
claims should not have been dismissed.
Accordingly, we reverse the appealed order in part and remand for
further proceedings on the tortious interference and UFTA claims.
BACKGROUND
¶2 The trial court terminated this litigation at the pleading
stage by granting motions to dismiss the Finches’ complaint, from whose
allegations we derive the following background facts. James Finch owned Finch’s Southside Lincoln-Mercury, Inc., which
in turn operated two motor vehicle dealerships in La Crosse and West Salem
from 1994 until 1999 under franchise agreements with Ford Motor Company. Finch and his wife, Tricia, own the land and
buildings where the two dealerships operated.
Representatives of Ford proposed in 1998 that Finch sell his
corporation’s Mercury and Lincoln dealership assets to Southside Lincoln-Mercury,
Inc. (Southside), a Delaware “dealer development corporation” formed and
controlled by Ford.
¶3 Finch’s corporation entered into an asset-purchase agreement
with Southside in 1999. Southside
agreed to purchase substantially all of the dealership’s assets, including its
franchise rights, which were relinquished to Ford so that Ford could, in turn,
grant them to Southside. In conjunction
with the sale of corporate assets, James and Tricia Finch entered into written
leases with Southside for the two dealership locations. The La Crosse dealership facility lease
was for a term of 120 months and required Southside to pay the Finches $17,000
per month, as well as to pay all real estate taxes, insurance, utilities, and
maintenance expenses. The West Salem
dealership facility lease was for a term of sixty months and obligated
Southside to pay $7,000 per month, again in addition to all real estate taxes,
insurance, utilities, and maintenance expenses. Ford also appointed three Ford employees (named as
defendants-respondents in the caption) to serve as directors of Southside.
¶4 Southside ceased doing business in early 2001 and, according
to the Finches, the corporation “transferred” its franchise rights to Ford for
no value. The Finches assert that the
franchise rights had a fair market value in excess of one million dollars. As a result of the business cessation and
franchise transfer, Southside did not have sufficient remaining assets to pay
its outstanding obligations, including its obligations to the Finches under the
two dealership leases. Southside
informed the Finches that it was insolvent and intended to default on all
future obligations under the leases.
¶5 The Finches sued Southside, Ford and the three directors,
alleging claims of breach of fiduciary duty and intentional interference with a
contract against both Ford and the directors, and a fraudulent transfer claim
under Wis. Stat. § 242.05(1) (2001-02)
against Ford. Ford, joined by the directors, moved to
dismiss the Finches’ claims on the basis of the following language contained in
both dealership facility leases:
Recourse
limited to Tenant corporation
20. No
recourse shall be had for payment of the rent, or performance of any other
obligations of [Southside], or for any claim based on, or otherwise in respect
of, this Lease, against any incorporator, stockholder, officer, director or
employee, as such, past, present, or future, of [Southside] or of any successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such
liability or claim of liability being, by execution of this Lease, and as part
of the consideration for the execution hereof by [Southside] expressly waived
and released.
¶6 The trial court accepted the defendants’ arguments and
dismissed all claims against Ford and the directors. The Finches appeal, contending that: (1) the
quoted language cannot be enforced to absolve Ford and the directors from tort
liability for intentional or reckless acts; (2) if not void as against
public policy, paragraph 20 is inapplicable to the claims the Finches’ pled;
and (3) in the alternative, paragraph 20 is ambiguous as to its scope, thereby
rendering dismissal of the Finches’ claims at this stage improper. The Finches also contend that each of the
dismissed causes of action were properly pled and must thus survive the
defendants’ dismissal motions.
ANALYSIS
¶7 Ford and the directors moved to dismiss the Finches’
complaint against them for failure to state a claim upon which relief can be
granted. See Wis. Stat. § 802.06(2)(a)6. The trial court granted the motions and
dismissed all claims against these defendants.
On appeal, however, the directors contend that we should employ summary
judgment methodology because the trial court considered a matter outside the
pleadings (paragraph 20 in the Finch-Southside lease), thereby converting the
motion to one for summary judgment. See
§ 802.06(2)(b) (“If on a motion asserting the defense … [of] failure
of the pleading to state a claim upon which relief can be granted … matters
outside of the pleadings are presented to and not excluded by the court, the
motion shall be treated as one for summary judgment ….”). The directors further contend that the
Finches were thus obligated, but failed, to file countering affidavits so as to
place in dispute the parties’ intent regarding the scope of paragraph 20.
¶8 The Finches referred to the lease in their complaint but did
not attach or incorporate it in their pleading. Ford first brought paragraph 20 to the court’s attention by
attaching a copy of it to its motion to dismiss. Ford contended in its trial court brief that federal case law
permits a court to consider a document attached to a motion to dismiss if the
document is referred to in the plaintiff’s complaint and is central to the
plaintiff’s claim. See Venture
Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.
1993). The Finches acceded to the
court’s consideration of the lease language, as did the directors. At no point, however, did the directors or
any other party contend that the trial court must treat the motions to dismiss
as summary judgment motions because it considered the lease language.
¶9 We note that when a court converts
a motion to dismiss for failure to state a claim into a motion for summary
judgment pursuant to Wis. Stat.
§ 802.06(2)(b), the court must notify the parties of its intent and
provide them a reasonable opportunity to present material made pertinent by Wis. Stat. § 802.08. CTI of Northeast Wisconsin, LLC v.
Herrell, 2003 WI App 19, ¶6, 259 Wis. 2d 756, 656 N.W.2d 794. This did not occur because, as we have
noted, all parties were content to have the court consider the lease language
in resolving the defendants’ motions to dismiss for failure to state a
claim. Because the directors
joined Ford in relying on the lease language to support their motion to dismiss
for failure to state a claim, we conclude they are estopped from making
arguments on appeal premised on the Finches’ failure to file countering
affidavits.
¶10 Our review is thus of the granting of a motion to dismiss for
failure to state a claim, a question of law that we decide de novo. See Beloit Liquidating Trust v. Grade
(Beloit II), 2004 WI 39, ¶17, 270 Wis. 2d 356, 677 N.W.2d
298. In our
review, we, like the parties and the trial court have done, will treat the
complaint as incorporating the language of the Finch-Southside lease. In examining the complaint, we are to
liberally construe the pleadings and accept as true all facts pleaded by the
plaintiff and all inferences that can reasonably be derived from those
facts. Id. Dismissal at the
pleading stage is appropriate only if it appears certain that under no
circumstances can the plaintiff recover.
Id.
I.
¶11 The Finches’ argument against allowing paragraph 20 to bar
their claims against Ford and the directors rests primarily on Restatement (Second) of Contracts
§ 195(1), which provides that “[a] term exempting a party from tort
liability for harm caused intentionally or recklessly is unenforceable on
grounds of public policy.” Id. They contend that the Restatement principle means that paragraph 20
cannot be enforced, at least insofar as it attempts to immunize any parties
from liability for “harm caused intentionally or recklessly.” The directors and Ford argue, however, that
Wisconsin law distinguishes between personal and economic injury and voids
“exculpatory clauses” only in personal injury cases, and then only where the
injured party would be deprived of any remedy if the clause was upheld. They maintain that, because the language at
issue here bars recovery for only economic injury and is contained in a lease
bargained between sophisticated commercial parties, we must give effect to the
language and uphold the dismissal of all of the Finches’ claims against them.
¶12 Before considering whether paragraph 20 is unenforceable
against the Finches’ claims on public policy grounds, we must first determine
whether any of the Finches’ three claims against these defendants fall within
its reach. If the language of paragraph
20 unambiguously does not apply to the Finches’ claims, as they contend is the
case, then the enforceability of paragraph 20 becomes irrelevant. We conclude that two of the Finches’ claims,
those alleging a breach of fiduciary duty and violation of the UFTA, are not
barred by paragraph 20 of the Finch-Southside lease.
¶13 Paragraph 20 precludes the Finches from having any “recourse …
against any … stockholder … [or] director” of Southside “for payment of the
rent, or performance of any other obligations of [Southside], or for any claim
based on, or otherwise in respect of, this Lease … whether by virtue of any
constitution, statute or rule of law.”
The term “recourse” carries a lay definition of “access or resort to a
person or thing for help or protection.”
Random House Dictionary of the
English Language 1613 (2d ed. 1987).
In legal contexts (outside of the law of banking and negotiable
instruments, where more specialized meanings apply), the term generally refers
to “[e]nforcement of, or a method for enforcing, a right.” Black’s
Law Dictionary 1280 (7th ed. 1999).
The most obvious effect of paragraph 20, therefore, is to negate any
potential claim that Ford, as the principal shareholder of Southside, or any
director of Southside, had either explicitly or implicitly guaranteed
Southside’s obligations under the lease.
That is, as to the payment of rent or other tenant obligations under the
lease, the Finches’ only “method for enforcing” their rights was to pursue
Southside itself, and they could not “resort to” Ford or the directors for any
“help or protection” regarding Southside’s obligations as a tenant.
¶14 As we will discuss more fully below, the Finches’ breach of
fiduciary duty and fraudulent transfer claims are premised on actions allegedly
taken by the directors and Ford to divest Southside of a valuable corporate
asset, thereby rendering the dealership corporation unable to pay its
debts. In pursuing these claims, the
Finches are not seeking to enforce any rights they possess as Southside’s
landlord. They rely, instead, on their
status as creditors of an insolvent corporation. The only link between the lease and these two causes of action is
that present and future unpaid rent is what renders the Finches unpaid
creditors of the allegedly insolvent corporation, Southside. Thus, Southside’s obligations under the
lease may become relevant in determining the amount of the Finches’ damages,
but they play no part in determining the liability of these defendants, that
is, whether the defendants breached any fiduciary duties to the Finches or
whether Ford was the recipient of a fraudulent transfer under Wis. Stat. ch. 242.
¶15 Ford and the directors, however, point to the language in
paragraph 20 that applies its provisions to “any claim based on, or otherwise
in respect of, this Lease.” The
defendants claim that this broad language was unambiguously intended to apply
to claims such as those before us now.
Ford, for example, argues:
The provision waives “all liability” from “any
constitution, statute or rule of law.”
Such broad language was required because a stockholder cannot be held
liable for a corporation’s breach of its lease. Any claim against Ford as the stockholder for Southside’s breach
of its lease therefore would necessarily involve some theory other than
breach of the lease. Waiving such
claims was precisely what the parties contemplated with the non-recourse
provision.
The directors similarly contend
that the “non-recourse provisions would have been unnecessary and redundant if
they were not intended to do more than simply reflect that Southside was the
contracting entity.”
¶16 We are not persuaded, however, that the language, “any claim
based on, or otherwise in respect of, this Lease,” is so all-encompassing that
it immunizes Ford and the directors from liability for any and all acts, no
matter how tenuously related to Southside’s obligations under the lease. An interpretation construing the reach of
paragraph 20 expansively would call into question the enforceability of the
language on public policy grounds. See
Dobratz v. Thompson, 161 Wis. 2d 502, 520, 468 N.W.2d 654
(1991) (noting that courts “will disfavor any exculpatory contract that is
broad and general in its terms” and “will closely scrutinize an exculpatory
contract and construe it strictly against the defendants.”).
¶17 The Finches’ claims of breach of fiduciary duties and
fraudulent transfer against the directors and Ford are an attempt to recover
money of which the Finches were allegedly wrongfully deprived because of
allegedly tortious acts or other misconduct of the defendants, actions that
were independent of and unrelated to Southside’s breach of its obligations
under the lease. Although success on
their claims for breach of fiduciary duties or a fraudulent transfer may result
in the Finches being able to recover amounts owed them under the leases with
Southside, the fiduciary duties and statutory obligations on which these claims
are based derive from sources other than the leases. Accordingly, we conclude that the Finches’
allegation that Ford and the directors breached fiduciary duties and
transferred assets in violation of Wis.
Stat. § 242.05(1) are not “claim[s] based on, or otherwise in
respect of” the lease.
¶18 The Finches’ tortious interference with contract claim also
involves allegedly wrongful conduct independent of a breach of the leases, but
the claim is much more closely tied to Southside’s obligations under the
leases. Unlike the breach of fiduciary
duties and fraudulent transfer claims, which the Finches bring as unsecured
creditors of an insolvent corporation, the tortious interference claim rests
squarely on the Finches’ contractual relationship with Southside. To establish the defendant’s liability for
tortious interference, the Finches must prove the existence of the contract and
show precisely how Ford or the directors wrongfully caused Southside not to
perform its contractual obligations. We therefore conclude that this cause of
action is a “claim based on, or otherwise in respect of” the Finch-Southside
leases. The tortious interference claim
is plainly an attempt by the Finches to collect from Southside’s directors and
controlling shareholder for their actions that resulted in Southside’s breach
of the leases, and it is thus barred by the language of paragraph 20 unless, as
the Finches assert, the provision may not be applied to this claim for reasons
of public policy, a question we next address.
¶19 “Exculpatory clauses” are not favored by the law because they
tend to allow conduct that falls below acceptable standards of care. Richards v. Richards, 181
Wis. 2d 1007, 1015, 513 N.W.2d 118 (1994). An exculpatory clause is not, however, automatically void and
unenforceable as contrary to public policy.
Id. Rather,
a court must closely examine whether such an agreement violates public policy,
strictly construing it against the party seeking to rely on it. Id.
¶20 Ford and the directors are correct that the cases relied upon
by the Finches, Keller v. Lloyd, 180 Wis. 2d 162, 509 N.W.2d
87 (Ct. App. 1993), Dobratz v. Thompson, 161 Wis. 2d 502,
468 N.W.2d 654 (1991), and Merten v. Nathan, 108 Wis. 2d
205, 321 N.W.2d 173 (1982), are all personal injury cases involving consumer
contracts. Moreover, the Finches have
not cited, and we have not located, any Wisconsin decision expressly voiding an
exculpatory clause as against public policy solely on the basis that the clause
attempted to exempt tort liability for harm caused intentionally or recklessly. Wisconsin courts have regularly recognized
this principle, however, and
we conclude it is applicable here, where the language of the exculpatory clause
is asserted to bar any liability on the part of Ford and the directors for
intentionally or recklessly wrongful conduct.
¶21 We find the reasoning in RepublicBank Dallas, N.A. v.
First Wisconsin Nat’l Bank of Milwaukee, 636 F. Supp. 1470 (E.D. Wis.
1986), both persuasive and on point. In
RepublicBank, the District Court refused to uphold a liability
disclaimer in a commercial agreement between two large banks barring economic
loss claims based on an alleged intentional misrepresentation. The court recognized both that Wisconsin had
“endorsed the position of the Restatement
(Second) of Contracts that exculpatory clauses are unenforceable on
public policy grounds where the alleged harm is caused intentionally or
recklessly,” and that there is no Wisconsin authority limiting this rule to
cases involving consumers or parties of unequal bargaining power. Id. at
1473. The court also distinguished between
clauses purporting to exculpate parties from negligent conduct and those
purporting to exculpate parties from reckless or intentional conduct. Id. The former are valid provided that
the parties’ intent is clear and public policy is not otherwise violated. Id. at 1474.
¶22 We see no reason why the Restatement principle should not be applied here, notwithstanding the
fact that, as the defendants argue, our refusal to enforce paragraph 20 to
preclude the Finches’ tortious interference with contract claim impinges on the
freedom of these “sophisticated commercial parties” to allocate risk by
contract. The “tension between the
principles of contract and tort law” are evident whenever a court considers the
enforceability of an exculpatory provision in a contract. See Richards, 181 Wis. 2d
at 1016. The fact that one party to an
exculpatory contract lacks sophistication in business matters or possesses
unequal bargaining power provides a separate basis for voiding an exculpatory
clause. See, e.g., Discount
Fabric House of Racine, Inc. v. Wisconsin Tel. Co., 117 Wis. 2d
587, 600, 345 N.W.2d 417 (1984). We
conclude, however, that this does not mean that the absence of such disparities
precludes a court from refusing to enforce an exculpatory provision on other
grounds.
¶23 Rather, we conclude that, under the Restatement rule, as
embraced by the Wisconsin Supreme Court in Merten, 108
Wis. 2d at 212-13, and subsequent cases (see footnote 9), an exculpatory
clause, though otherwise valid as applied to some causes of action, cannot
operate to relieve a party from the consequences of intentional or reckless
conduct. The rule is grounded in sound
public policy for, as noted in the Restatement, the law of torts imposes standards
of conduct for the protection of others against unreasonable risk of harm, and
a party should not be able to exempt itself by contract from liability for harm
that it intentionally or recklessly causes.
Restatement (Second) of Contracts
§ 195 cmt. a (1979).
¶24 As we have noted (see footnote 8), tortious interference with a
contract is an intentional tort inasmuch as the interference complained of must
be alleged and proven to be intentional.
Accordingly, paragraph 20 is unenforceable against the Finches’ claim
for tortious interference with their leases with Southside. Because all three of the Finches’ causes of
action thus survive the language of paragraph 20, we next address other
asserted infirmities requiring the dismissal of each claim.
II.
¶25 The trial court did not analyze whether the Finches’ complaint
properly alleged the three claims against Ford and the directors because the
court concluded that the language of paragraph 20 was effective to bar them
all. Because our review of the
determination of a motion to dismiss for failure to state a claim is
de novo, however, there is no impediment to our considering the
defendants’ remaining arguments in support of their motions to dismiss. We first address the Finches’ claim that, by
transferring Southside’s franchise rights to Ford for no value, the directors
and Ford, as Southside’s controlling shareholder, breached fiduciary duties
owed to the Finches as unsecured creditors of an insolvent corporation.
¶26 A threshold issue is presented—whether
Delaware or Wisconsin law should determine the viability of the Finches’ breach
of fiduciary duties claim. The
Finches, perceiving Delaware law to be more favorable in establishing the viability
of their fiduciary duty claims against both Ford and the directors, urge us to
apply the law of Delaware, the state of Southside’s incorporation. The defendants argue that Wisconsin law
should apply to this dispute because Southside’s business operations were
exclusively located here, as were its dealings with the Finches and the leased
real estate. These connections to
Wisconsin, in the defendants’ views, far outweigh the single tie to Delaware as
the state of Southside’s incorporation.
¶27 After the briefing of this appeal was completed, we decided an
appeal that addressed this very choice of law issue. We concluded that, under the “internal affairs doctrine” and the
“Heath factors,”
the law of the state of incorporation should govern a breach of fiduciary claim
brought by a committee of creditors against officers and directors of a
Delaware corporation having its principal place of business in Wisconsin. See Beloit Liquidating Trust v. Grade
(Beloit I), 2003 WI App 176, ¶¶29-38, 266 Wis. 2d 388, 669 N.W.2d
2d 232, reversed, 2004 WI 39, 270 Wis. 2d 356, 677 N.W.2d 298. The parties submitted supplemental letter
briefs on the application of our analysis in Beloit I to the
present facts. The supreme court
accepted review of that case, however, and it reversed our choice of law
determination. See Beloit II,
2004 WI 39, ¶¶17-32. The parties once
again provided supplemental letter briefs.
Because we now have the benefit of the supreme court’s very recent
choice of law analysis in a closely analogous dispute, as well as the parties’
input on how Beloit II should be applied here, we proceed
directly to a determination of the choice of law issue under the Beloit
II holding.
¶28 The supreme court
explained in Beloit II that Wis.
Stat. § 180.1704 is “helpful in discerning our legislature’s intent with
respect to corporations and choice of law principles.” Id., ¶23. The court concluded that:
Section 180.1704 puts all
corporations on notice that, when transacting business in Wisconsin, they are
subject to Chapter 180. Given this
clear statutory language, and Wisconsin’s failure to adopt the internal affairs
doctrine [see footnote 10], either by statute or through case law, we conclude
that the language of § 180.1704 supports the holding that Wisconsin law
should be applied in determining whether … directors or officers breached their
fiduciary duty to … creditors.
Id. The court also went on to consider “two
applicable tests when deciding which forum’s laws apply.” Id., ¶24. The first is “‘whether the contacts of one
state to the facts of the case are so obviously limited and minimal that
application of that state’s law constitutes officious intermeddling.’” Id. (citation omitted). The
second is an examination of the five “Heath factors” (see
footnote 11). Id., ¶25.
¶29 We conclude that Wis.
Stat. § 180.1704 and the two tests cited in Beloit II dictate
that we apply Wisconsin law in the present litigation. Southside’s only contact with Delaware was
that it was incorporated there.
Southside did all of its business in Wisconsin, the lease agreements
with the Finches were entered into here, and they deal with Wisconsin real
estate. Although it is true that
Southside’s controlling shareholder and its directors are from outside
Wisconsin, that fact does not strengthen Southside’s ties to Delaware (Ford’s
principal place of business is in Michigan, and the directors reside in
Michigan and Missouri). There appears
to no connection between Southside and Delaware other than the fact of
incorporation, and “application of Delaware law in this case would constitute
officious intermeddling with the laws of Wisconsin.” See id., ¶24.
¶30 Finally, the “Heath factors” (see footnote 11)
also weigh in favor of applying Wisconsin law.
This dispute involves business conducted in Wisconsin, and Wis. Stat. § 180.1704 “is clear on
its face and puts corporations on notice that, if they choose to transact
business in this state, they will be subject to Wisconsin law,” thereby
enhancing the predictability of results.
Id., ¶26. For the
same reason that Wisconsin law is preferred under the test for “officious
intermeddling,” interstate order is maintained by applying the law of Wisconsin
because our state has more significant contacts with Southside than does
Delaware. See id.,
¶27. Next, application of our own law,
as opposed to the law of a foreign jurisdiction, will always simplify our
judicial task, except where Wisconsin law is complex or uncertain as compared
to that of the other jurisdiction, Heath v. Zellmer, 35
Wis. 2d 578, 597, 151 N.W.2d 664 (1967), and “Wisconsin law regarding
whether officers and directors owe a fiduciary duty to a corporation’s
creditors is not complex or unmanageable,” Beloit II, 2004 WI 39,
¶28. Wisconsin is the forum
state and our governmental interests are advanced by applying Wisconsin law to
disputes litigated here inasmuch as “it is the duty of a Wisconsin court to
identify and effectuate Wisconsin policies.”
Heath, 35 Wis. 2d at 597. Finally, “Wisconsin laws regarding a corporation’s duty to its
creditors are not obsolete or senseless,” Beloit II, 2004 WI 39,
¶31, and we may thus perceive it as the “better law.” Heath, 35 Wis. 2d at 598.
¶31 Therefore, in our review of whether the Finches’ complaint
states viable claims against Ford and the directors for breaches of fiduciary
duties, we will consult and apply Wisconsin law. After Beloit II, there can be little dispute that
Wisconsin courts recognize a fiduciary duty owed by the officers and directors
of a corporation to maximize the value of the corporation’s remaining assets
for the benefit of its unsecured creditors once the corporation is both
(1) insolvent and (2) no longer “a going concern.” See Beloit II, 2004 WI 39,
¶¶34-39; McGivern v. Amasa Lumber Co., 77 Wis. 2d 241, 254,
252 N.W.2d 371 (1977). We conclude that
the Finches’ complaint, whose allegations we must take as true, states a claim
for breach of fiduciary duty against the directors: it asserts that
Southside “was insolvent or on the brink of insolvency” and had “ceased doing
business” when the directors authorized the transfer of the franchise rights
for no value.
¶32 The Finches make the same allegations in their breach of
fiduciary duty claim against Ford, Southside’s controlling shareholder. As Ford points out, however, the Finches
provide no support in Wisconsin law for the proposition that a corporation’s
controlling shareholder owes a fiduciary duty to unsecured creditors of the
corporation under these, or any other, circumstances. While we might not go so far as Ford’s assertion that permitting
the Finches to go forward on their claim against it for breach of fiduciary
duties would “turn corporate law on its head,” we acknowledge that the notion
gives us pause. See Consumer’s
Co-op of Walworth County v. Olsen, 142 Wis. 2d 465, 475, 419
N.W.2d 211 (1988) (noting Wisconsin’s “unwavering adherence to the general
principle of shareholder nonliability” for corporate debts). We conclude, however, that the Finches’
breach of fiduciary duties claims suffer from a separate infirmity, one which
infects its claims against the directors as well: the Finches lack
standing as individual creditors to pursue these claims under Wisconsin law.
¶33 In Wisconsin,
[a]n action by a creditor … under the general equitable
powers of the court is brought on behalf of the corporation for the benefit of
all of its creditors, any amounts recovered to be restored to the corporation
or to such assignee or other person who has a right thereto in lieu of the
corporation. If the directors’ breach
of their duties has caused a loss to the corporation, the liability of the
directors is deemed to be an asset of the corporation. It is only if the creditor suffers a single
and exclusive injury resulting from a direct tort of the director or officer
that the creditor, in his or her own right, may sue the director or officer.
McGivern, 77
Wis. 2d at 257-59 (footnotes and citations omitted). The supreme court explained in a footnote
that an “action on behalf of all creditors avoids multiplicity of suits and
provides an orderly procedure by which relief can be obtained for all aggrieved
creditors rather than the lucky few who prosecute first.” Id. at 258 n.10.
¶34 The Finches argue that we should not treat the quoted passage
from McGivern as binding because it dealt with statutory
provisions that have been repealed and is, moreover, “dicta.” We disagree on both points. We first note that, in discussing the
“standing” issue in McGivern, the court referred not only to
actions brought under the repealed statutory provisions, but also to those
brought “under the general equitable powers of the court.” Id. at 258. We also do not view the court’s discussion
of standing as dicta but as an alternative rationale for the court’s
holding. See id. at
255-56 (“There is an additional difficulty with [the plaintiff]’s position
here. Even where it could be said that
in some sense a fiduciary obligation existed to creditors generally, the issue
remains as to who has the right to sue for losses due to the breach of
duty.”). The applicability of the
court’s conclusion on standing to the facts before it was clearly stated:
[The
plaintiff] was suing on her own behalf—not on behalf of [the corporation] or
the creditors…. [H]er attempt to hold [a director and an officer] liable to her
as a fiduciary must fail. [The
plaintiff] claims that a general fiduciary obligation is owed by the directors
and officers of a solvent corporation to each creditor personally. No such personal duty exists.
McGivern, 77
Wis. 2d at 260. In short, we
conclude that the court’s answer to the question of who may sue to recover for
an alleged breach of a director’s fiduciary duty owed to creditors of the
corporation is as central to the court’s holding in McGivern as
is its conclusion regarding the absence of a duty unless the corporation is
insolvent and no longer a “going concern.”
¶35 Furthermore, we note that in our Beloit I
decision we relied on the standing discussion in McGivern to
resolve the question of “who could sue to recover for any breach” of the duty
owed by officers and directors of an insolvent corporation to its
creditors. We concluded that “the
mechanism by which creditors, as a group for the benefit of the bankruptcy
estate, could seek recompense for the actions of the defendants that allegedly
caused harm to the creditors as a group” was properly employed in that case
because the plaintiff was a committee appointed by the bankruptcy court to sue
the directors and officers on behalf of the corporation. Beloit I, 266 Wis. 2d
388, ¶42. Although the supreme court
reversed our decision in Beloit I, it was for other reasons,
and the court did not comment on our discussion of the standing issue. More importantly, the supreme court placed
considerable reliance on the McGivern decision to “solidify” its
conclusions regarding the necessary prerequisites for creditors’ suits against
a corporation’s officers and directors for breaches of fiduciary duties. Beloit II, 2004 WI 39,
¶38. Although the supreme court did not
expressly endorse the McGivern “standing” analysis in Beloit
II, as we did in Beloit I, the court’s recent reliance on
McGivern persuades us that it remains a valid exposition of
Wisconsin law applicable to the issue before us.
¶36 In summary, the trial court did not err in dismissing the
Finches’ breach of fiduciary duty claims against the directors and Ford. In their breach of fiduciary duties claims,
the Finches allege no misconduct by the defendants directed toward them
personally but rely solely on their status as unsecured creditors of the corporation. The complaint alleges neither an intent on
the Finches’ part to seek redress on behalf of all unsecured creditors
generally, nor facts that would establish their authority to pursue the
fiduciary duty claims in a representative capacity. The claims brought solely on behalf of the Finches as an
individual creditor of Southside cannot go forward.
III.
¶37 As we have noted (see footnote 8), the elements of tortious
interference with a contract include a showing that the defendant was not
justified or privileged to interfere with the contract in question. Both Ford and the directors assert that the
Finches’ tortious interference claim must fail because they failed to allege
facts sufficient to establish that either Ford or the directors were not
justified or privileged in causing Southside to breach its lease with the
Finches. As the supreme court has
explained:
If a director or managing officer acting bona fide
procures, causes or participates in authorizing a breach of contract between
his company and a third person, he may well be regarded as protected only by a
conditional privilege, which will be destroyed by a wrongful motive. This conditional privilege of corporate
representatives should be recognized in the interest of freedom in exercising
discretion to protect the best interests of the corporation which they
represent.
Sprecher v. Weston’s Bar,
Inc., 78 Wis. 2d 26, 40, 253 N.W.2d 493 (1977) (quoting H. Ballantine, On Corporations,
§ 112, at 275-76 (rev. ed. 1946)).
A similar privilege is accorded majority shareholders of a
corporation. See Mendelson v.
Blatz Brewing Co., 9 Wis. 2d 487, 491-93, 101 N.W.2d 805 (1960).
¶38 “The burden of proving lack of privilege, however, is generally
not ascribed to the plaintiff. Rather,
proof of intentional interference with the existing contractual relations of
another is sufficient to establish liability, shifting the burden of proving
the justification for such interference upon the defendant ….” Chrysler Corp. v. Lakeshore Commercial
Fin. Corp., 389 F. Supp. 1216, 1221 (E.D. Wis. 1975); see also Wis JI—Civil 2780 (2003) (burden of
proof as to whether defendant was privileged or justified to interfere with
contractual relationship is on the defendant).
We therefore conclude that, to survive a motion to dismiss, it is not
necessary for a plaintiff to allege facts sufficient to establish the absence
of privilege or justification. Rather,
it is enough to assert that the act or acts constituting intentional
interference was, in fact, not privileged, which the Finches have done.
¶39 The Finches alleged in their complaint that Ford and the
directors’ “intentional interference” with the Southside-Finch lease “was
improper and not privileged.”
Additionally, it may reasonably be inferred from the Finches’
allegations that Ford and the directors, who were Ford employees, caused
Southside to transfer to Ford franchise rights worth “in excess of $1,000,000,”
in order to confer financial benefits on Ford to the detriment of the Finches’
rights as Southside’s landlord, an arguably improper motive. Cf. Lorenz v. Dreske, 62
Wis. 2d 273, 287, 214 N.W.2d 753 (1974) (holding that a complaint is
sufficient if it alleges “that the act of procuring a breach of contract was
done with an improper motive”).
¶40 Ford argues, however, that it derived no benefit from the
cessation of Southside’s business (“Ford had no interest in the destruction of
the Finches’ business….”) and that the surrender of Southside’s franchise due
to its cessation of business was authorized under the franchise agreement
(“Ford could have terminated their franchise rights to protect their
contractual rights as franchisor.”). We
conclude that Ford’s assertions rely on facts that are not of record at this
stage of the litigation. It may well be that Ford and the directors
can establish, on a motion for summary judgment or at trial, that they indeed
acted within the conditional privilege recognized by Wisconsin law which
permits corporate directors and majority shareholders to act in ways that cause
a corporation’s contracts with third parties to be breached. We cannot conclude at the pleading stage,
however, that there are no circumstances under which the Finches will be able
to prevail. See Hartridge v. State Farm Mut. Auto. Ins. Co., 86 Wis. 2d 1, 4-5, 271 N.W.2d 598 (1978) (noting
that dismissal, at the pleading stage, is appropriate only if it is clear that
under no circumstances can the plaintiff recover).
¶41 We also conclude that the Finches’ complaint properly alleges
the remaining elements for a tortious interference with contract claim. The amended complaint alleges the existence
of a contract between themselves and a third party, Southside. It alleges that both the directors and Ford
intentionally interfered with that relationship by causing Southside to cease
doing business and to transfer the dealership franchise rights to Ford for no
value. Finally, the amended complaint
alleges that the defendants’ actions resulted in Southside’s insolvency which,
in turn, caused the Finches to suffer pecuniary loss in the form of unpaid
rents due under the leases. In short,
the Finches have adequately pled a cause of action against both the directors
and Ford for intentional interference with a contract, and the trial court
erred in dismissing this cause of action.
IV.
¶42 The Finches’ final claim is that the transfer of the franchise
rights to Ford for no value violated Wisconsin’s Uniform Fraudulent Transfer
Act, Wis. Stat. § 242.05(1). Ford did not argue to the trial court, in
support of its motion to dismiss, that the Finches had failed to state a claim
under UFTA, relying instead on the argument that paragraph 20 of the lease
barred this claim. A review of both Ford’s and the Finches’ trial court briefs
reveals no discussion of the § 242.05(1)
claim beyond whether it was barred by the language of the paragraph 20. The general rule is that issues not
presented to the trial court will not be considered for the first time on
appeal, State v. Caban, 210 Wis. 2d 597, 604, 563 N.W.2d 501
(1997), and the Finches ask us to deem the issue waived. The waiver rule, however, generally applies
only to appellants, and we will usually permit a respondent to employ any
theory or argument on appeal that will allow us to affirm the trial court’s
order, even if not raised previously. See
State v. Holt, 128 Wis. 2d 110, 124-25, 382 N.W.2d 679 (Ct.
App. 1985).
¶43 Ford’s basic
argument is that the rights it granted Southside under the franchise agreement
do not constitute an “asset,” and that Southside’s relinquishment of those
rights was not a “transfer,” within the meaning of Wis. Stat. ch. 242.
Specifically, Ford asserts that it “had the right to terminate
Southside’s franchise rights and Southside could not transfer those rights
without Ford’s approval.” As with the
defendants’ arguments regarding their asserted privilege to cause Southside to
breach its lease with the Finches, however, Ford’s arguments cannot be
evaluated at this stage of the litigation.
The franchise agreement is not of record, and notwithstanding the
general principles of franchise law on which Ford seeks to rely, a
determination whether the agreement created a transferable asset within the
meaning of the UFTA requires an examination of the rights and responsibilities
of the parties under the franchise agreement.
¶44 We are thus not
convinced, based solely on the Finches’ pleading, that under no circumstances
can they recover on this claim.
Accordingly, we conclude the trial court erred in dismissing it.
CONCLUSION
¶45 For the reasons
discussed above, we affirm the appealed order insofar as it dismissed the
Finches’ claims against the directors and Ford for breach of fiduciary
duties. We reverse the dismissal of the
tortious interference with contract claim against the defendants and the UFTA claim
against Ford. We remand to the circuit
court for further proceedings on these claims.
By the Court.—Order affirmed in
part; reversed in part and cause remanded with directions.
State v. Gove, 148 Wis. 2d
936, 944, 437 N.W.2d 218 (1989)
(holding that the doctrine of judicial estoppel recognizes that “[i]t is
contrary to fundamental principles of justice and orderly procedure to permit a
party to assume a certain position in the course of litigation which may be
advantageous, and then after the court maintains that position, argue on appeal
that the action was error.”).