Opinion ID: 1942673
Heading Depth: 3
Heading Rank: 1

Heading: Corporate law principles

Text: ¶ 23 The plaintiffs' argument regarding standing has never before been acknowledged in Wisconsin law, and if the plaintiffs' claims were to survive, there would be no stopping point to liability. Absent additional facts that would support a corresponding responsibility, separate corporate entities do not have standing to seek the relief sought in this case. The lack of any stopping point provides support for the logic behind these longstanding corporate principles. If the plaintiffs' claims were to survive, any business could sue another business's advisor whenever that business advice negatively affects a plaintiff's business. These plaintiffs do not have standing to bring an action for damages to EOG Environmental. The fact that the plaintiffs have been affected by the misappropriations is not enough to confer standing upon them to seek these damages. ¶ 24 In this case, each of the three corporations are separate corporate entities. Each corporation was specifically classified: a C-corporation, an S-corporation, or a limited liability company. See 2 Jay E. Grenig & Nathan A. Fishbach, Wisconsin Practice Series, Methods of Practice §§ 50.10-50.16 (4th ed.2004) (discussing the difference between each type of corporation and when to use and not to use each entity). The plaintiffs cannot pick and choose when they would like to operate separately and when they would like to operate as one corporation. Their business's interdependence does not blur the entities' distinct corporate structures. ¶ 25 A particular type of corporation may be the preferred method of doing business for any number of reasons including tax and liability implications, see id. at §§ 50.1, 50.20-50.36, and these individuals chose to operate a business by creating separate and distinct corporate entities. Presumably, Krier and Michael Vilione made a conscious decision to create three different corporations with different types of corporate entities to carry out their operations. While they likely enjoyed certain advantages from doing business as three separate corporate entities, they also are bound by the disadvantages of forming separate corporations. See Terry v. Yancey, 344 F.2d 789, 790 (4th Cir.1965) (stating where an individual creates a corporation as a means of carrying out his business purposes he may not ignore the existence of the corporation in order to avoid its disadvantages). ¶ 26 The plaintiffs essentially assert that because the entities function as one overall business, corporate principles ought to be overlooked in the interest of justice. However, when Krier and Michael Vilione were joint owners of the three entities, if one of their corporate entities were being sued, Krier and Michael Vilione would not likely suggest that the corporations were actually interdependent such that the assets of all three entities would be available for damages. In fact, in a business such as waste disposal, there may be deliberate reasons to separate the entity that holds assets from other entities that might have greater exposure to liability. One cannot maintain the corporate structure when it inures to one's benefit and then ignore the constraints of corporate law when it does not. These parties formed separate entities that remain separate entities. ¶ 27 We would abandon fundamental corporate law principles if we accepted the plaintiffs' theory of standing and liability. Fletcher Cyclopedia of the Law of Corporations provides that a corporation does not have independent standing to sue for injuries done to a sister or subsidiary corporation, despite the fact that their businesses are intertwined and the success of one is dependent on that of the other. 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 36 at 95-96 (perm.ed., rev. vol.2006) (citing Picture Lake Campground, Inc. v. Holiday Inns, Inc., 497 F.Supp. 858 (E.D.Va.1980)). ¶ 28 By way of example, in Picture Lake, a sister corporation of Picture LakeFirst Managementalleged that the actions of Holiday Inns destroyed the value of First Management. Picture Lake, 497 F.Supp. at 860-61. Picture Lake and Holiday Inns entered into a franchise agreement to develop a travel park. Id. First Management owned and leased the property to Picture Lake, and Picture Lake operated the travel park business. Id. at 862. When Holiday Inns allegedly breached the licensing agreement with Picture Lake and discontinued development of the travel park, First Management argued that the entities' operations were so intertwined that itbeing a sister corporation of Picture Lakeshould be able to make a claim against Holiday Inns. Id. at 862-63. The court concluded that Picture Lake did not have standing to pursue its claim. Id. Relying on the fact that a choice to create separate entities must be honored, the court concluded: First Management has no independent standing to sue simply because the business and property interest of First Management and Picture Lake are allegedly intertwined and dependent upon the success of the Trav-L-Park system. To have standing to sue for damages for tortious injury to business or property, First Management must have an interest in the business or property allegedly injured. In addition, just as a stockholder of a corporation has no standing to sue third parties for wrongs inflicted by those third parties upon the business and property interest of the corporation, it is evident that First Management has no standing to sue Holiday Inns for wrongs allegedly inflicted by Holiday Inns on the business or property interest of Picture Lake. Moreover, the Court believes that First Management has no standing to sue for injuries inflicted indirectly or consequentially upon the business or property interest of First Management as a result of the alleged tortious conduct of Holiday Inns towards Picture Lake. The parties have not cited and the Court is not aware of any authority to the contrary. Id. at 863 (citation and footnote omitted). ¶ 29 The damages to EOG Environmental belong to EOG Environmental and as a result, EOG Environmental or its shareholders could have made a claim against the accountants. However, Krier, as an individual who is not a current shareholder of EOG Environmental, lacks standing to file an action on EOG Environmental's behalf and even if he was a current shareholder, his standing would be in the form of a derivative action rather than a direct action. ¶ 30 Had Krier, when he was a shareholder of EOG Environmental, brought a derivative action to recover the corporate loss, EOG Environmental would have been made whole in 2002. Had EOG Environmental been made whole at that time, plaintiffs' current claims for consequential damage would be nonexistent. When Krier was still a shareholder of EOG Environmental, he had an opportunity to significantly limit or eliminate the future damages that he now seeks to recover. Instead he chose to enter into a new business relationship and now wishes to recover for that choice. ¶ 31 It is logical then that when misappropriations from a corporation occur, the right of action belongs to the corporation. See Rose v. Schantz, 56 Wis.2d 222, 229, 201 N.W.2d 593 (1972) (stating that `[r]ights of action accruing to a corporation belong to the corporation, and an action at law or in equity, cannot be maintained by the members as individuals' (citation omitted)). At most, even if the accountant was assisting his brother with the misappropriations from EOG Environmental, Krier's right to recovery would have to be as a shareholder of EOG Environmental, not in his own stead or as another affected entity. Id. (stating [w]here the injury to the corporation is the primary injury, and any injury to stockholders secondary, it is the derivative action alone that can be brought and maintained). While it is clear that primary and direct injury to a corporation may have a subsequent impact on the value of the stockholders' shares, that subsequent impact is not enough to create a right to bring a direct, rather than derivative, action. Id. When money is being misappropriated or stolen from a corporation, the damage is to the corporation, and as a result, the appropriate action is a derivative action and not a direct action. [13] See 12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations §§ 5911, 5913, 5924 (perm.ed., rev.vol. 2009) (asserting that generally misappropriation, waste, and mismanagement only give rise to derivative actions); but see id., § 5924.10 (asserting that some courts may allow a direct action where plaintiff and defendant are both 50% shareholders). ¶ 32 In this case, however, Krier can no longer even bring a derivative action based on the misappropriations from EOG Environmental because he is no longer a shareholder in EOG Environmental. See Wis. Stat. §§ 180.0103, 180.0741. `Shareholder' means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. Wis. Stat. § 180.0103. Therefore, to have standing pursuant to Wis. Stat. § 180.0741, one must be a current shareholder to initiate a claim on behalf of the corporation. [14] ¶ 33 If the plaintiffs' theory were to survive and they were allowed to bring a claim for damages to their entities because of a misappropriation to a separate entity to which they have no status as shareholder, they would be placed in a better position than a shareholder of the victim corporation. Certainly a shareholder of the victim corporation should not be placed in an inferior status to third-party entities that were affected by the misappropriation. We know that a shareholder does not have the right to pursue those individual damages for the affect of wrongdoing to a corporation. Rose, 56 Wis.2d at 229, 201 N.W.2d 593. In fact, the shareholder would only have status of a derivative nature to bring action on behalf of the corporation. Id. Under the theory advanced by the plaintiffs, we would actually be placing a shareholder who is directly affected by the misappropriation in a far inferior position to plaintiffs who are consequentially affected. Since a shareholder lacks standing to make a direct claim for such damages, id., it follows that a distinct entity would not have greater standing than the shareholder. ¶ 34 Because Krier is a shareholder of EOG Disposal and Vil-Kri, he may be able to bring a derivative action against the accountant for the accountants' failures with regard to Michael Vilione's misappropriations from EOG Disposal or Vil-Kri. Rose, 56 Wis.2d at 229, 201 N.W.2d 593; see Wis. Stat. §§ 180.0103, 180.0741. However, that standing is distinct from Krier's standing to bring an action for such injury to EOG Environmental, and Krier cannot now seek damages from the accountants because action with respect to a separate corporation has caused his business to be less lucrative. In short, the assets of a corporation belong to that corporation. Rose, 56 Wis.2d at 229, 201 N.W.2d 593. Krier relinquished any right to the assets of EOG Environmental or any such derivative claim when he relinquished his ownership in that corporation two years previous with knowledge that the assets of EOG Environmental had been depleted. It stretches the bounds of imagination to conclude that one who has no right to sue on behalf of the corporation can then maintain a lawsuit based upon a sister corporation's diminution in value because a misappropriation to the separate corporation affected another business.