Court Opinion

ID: 9699365
Source: CourtListenerOpinion
Date Created: 2023-08-25 20:20:51.932072+00
Date Added: 2024-06-11T18:20:49.348120
License: Public Domain

ANN WALSH BRADLEY, J.
¶ 70. {dissenting). I agree with the analysis and conclusion of a unanimous court of appeals that the plaintiffs "have asserted their own claims for damages, which are separate from those that could allegedly be claimed by EOG Environmental." See Krier v. Vilione, 2007 WI App 235, ¶ 24, 306 Wis. 2d 147, 742 N.W.2d 537. "[A]s parties claiming to *329have been injured by [the accountants'] malpractice, they seek to recover damages that they incurred." Id., ¶ 26. Therefore, the plaintiffs' "interests are more than sufficient to confer standing." Id., ¶ 25.
¶ 71. The majority, however, disagrees with the court of appeals and concludes that Henry Krier has no standing to assert a claim. It determines that Krier's claims are not his own, but rather are claims that could only be made by shareholders of EOG Environmental. See majority op., ¶ 31.
¶ 72. Even if we would assume that the majority was correct and that standing to bring these claims could be conferred solely on shareholders of EOG Environmental, the majority erroneously concludes that Krier, as a shareholder, would be entitled to bring only a derivative claim. See id. Instead, the conclusion should be that Krier can maintain a direct claim for an injury primarily to himself as a shareholder of EOG Environmental.
¶ 73. I write separately to highlight the majority's cursory and erroneous analysis of the issue actually presented and to emphasize that its conclusion directly contradicts this court's recent decision in Notz v. Everett Smith Group, Ltd.1 Additionally, I take issue with the majority's mischaracterization of the plaintiffs' allegations and its unbridled tendency to reach out and decide issues not briefed in this case. Accordingly, I respectfully dissent.
I
¶ 74. Henry Krier was a 47 percent shareholder in EOG Environmental until 2003. He has produced evidence that, over a period of four years, EOG *330Environmental's director and shareholder Michael Vilione routinely took money from the corporation for his personal use. A partial list of Michael's personal "withdrawals" from corporate accounts includes: checks payable directly to Michael or his wife totaling $469,640; $98,502 for household expenses for Michael's family; $85,583 for Michael's automobile expenses; another $182,608 for what appear to be more personal and household expenses, and an $11,000 payment on the purchase of a vacation home in Palm Springs, California.
¶ 75. Krier alleges that EOG Environmental's accountant, Donald Vilione, "knowingly falsified the accounting records for the enterprise to cover up and conceal the misappropriation of enterprise funds[.]" A report submitted by Krier's expert accountant lists various accounting tricks used in furtherance of this purpose. The complaint alleges a number of interrelated claims including accounting negligence, negligent misrepresentation, breach of fiduciary duty, conspiracy, injury to business, and violation of the Wisconsin Organized Crime Control Act.2
¶ 76. The issue is whether Krier has standing to maintain a direct action against the accountants. The answer depends on whether their actions resulted in an injury primarily to Krier, or an injury primarily to the corporation. See majority op., ¶ 31 (citing Rose v. *331Schantz, 56 Wis. 2d 222, 229, 201 N.W.2d 593 (1972)). As we have previously explained, when an injury is primarily to a shareholder, that shareholder can bring a direct cause of action. Rose, 56 Wis. 2d at 228-29. When the injury is primarily to the corporation, a shareholder derivative action is appropriate. Id. at 229.
¶ 77. On the question of whether the injury was primarily to the corporation or to Krier, the majority's analysis is brief and conclusory: "It is logical.. . that when misappropriations from a corporation occur, the right of action belongs to the corporation." Majority op., ¶ 31. Thus ends the analysis.3
¶ 78. Wisconsin case law provides no explicit test for determining when an injury is "primarily to the corporation." Notz, 316 Wis. 2d 640, ¶ 23. The only articulated test is for whether an injury is "primarily to an individual shareholder." Id. That test is found in Jorgensen v. Water Works, Inc. (Jorgensen II), 2001 WI App 135, ¶ 16, 246 Wis. 2d 614, 630 N.W.2d 230.
*332¶ 79. In Jorgensen II, three couples were the sole directors of a close corporation and they owned equal shares. Id., ¶¶ 2-3. Following a dispute, the Jorgensens were removed as directors, and the corporation stopped paying the Jorgensens weekly director's fees. Id., ¶ 4.
¶ 80. The circuit court determined that "it was obvious" that these director's fees were "related to profits of the corporation" rather than salaries paid "as compensation for work done." Id., ¶ 6. That is, the court concluded that the fees were in reality distributions of the corporation's profits.
¶ 81. The court of appeals concluded that an injury is "primarily an injury to an individual shareholder" when it "affects a shareholder's rights in a manner distinct from the effect upon other shareholders." Id., ¶ 16. When the shareholder's rights are violated in a manner that "inflict [s] a harm on [the shareholder] that other shareholders did not suffer," the shareholder has a direct cause of action. Id., ¶ 18. Because the corporation stopped paying the Jorgensens distributions that other shareholders received, the court concluded that the Jorgensens' rights were affected in a manner distinct from the effect upon other shareholders, and were thus entitled to bring a direct claim. Id.
¶ 82. In this case, however, the majority fails to apply the Jorgensen II test.4 Without analysis, the *333majority states that "when misappropriations from a corporation occur, the right of action belongs to the corporation." See majority op., ¶ 31. The majority never examines whether Krier's rights were affected in a manner distinct from the effect upon another shareholder, Michael Vilione.
¶ 83. When the Jorgensen II test is faithfully applied, however, one must conclude that Krier's rights were affected in a manner distinct from the effect upon Michael Vilione. According to the allegations, Michael was paying himself a direct distribution of EOG Environmental's profits, unrelated to any work that Michael did for the corporation. Due to the misappropriation and the coverup, the value of Krier's investment was driven into the ground. At the same time, Michael Vilione directly profited. This is not a case where all shareholders were affected equally by misappropriation from the corporation. Instead, the injury was primarily to Krier, and he can assert a direct claim against Donald Vilione.
II
¶ 84. In addition to its failure to apply the primary injury test, the majority's conclusion directly contradicts our recent holding in Notz v. Everett Smith Group Ltd. See 316 Wis. 2d 640. The inevitable result is confusion in the law.
¶ 85. In Notz, this court held that when a "constructive dividend" is distributed to some shareholders but not to others, the shareholders who did not receive *334the dividend can bring a direct claim. 316 Wis. 2d 640, ¶¶ 4, 27. In that case, the corporation had the opportunity to acquire another business. Id., ¶ 9. The corporation conducted due diligence, but ultimately, the directors and controlling shareholder caused the corporation to pass on acquiring the business. Id. Instead, the directors and controlling shareholder purchased the business themselves. Id. A minority shareholder brought suit, alleging that the directors and controlling shareholder had breached a fiduciary duty and that he sustained an injury primarily to himself as a result. See id., ¶ 10.
¶ 86. To be clear, there were no actual "dividends" paid in Notz. See id., ¶ 24. Nonetheless, this court focused on the fact that the due diligence expenditure financially benefitted the controlling shareholder, but the minority shareholder received no corresponding financial benefit. Id., ¶ 27. The court determined that the money paid for due diligence could be considered a "constructive dividend" or a "dividend-like payment." Id., ¶¶ 4, 27. Because the minority shareholder did not receive any benefit from this "constructive dividend," his "rights as a shareholder were affected 'in a manner distinct from the effect upon other shareholders,'" and he could bring a direct action for breach of fiduciary duty.5 Id., ¶ 27 (citing Jorgensen II, 246 Wis. 2d 614, ¶ 16).
¶ 87. The giving of the "constructive dividend" in Notz differed little from putting a check for that amount directly in the pocket of the controlling share*335holder. The court in Notz concluded that this same type of disparate treatment "was at issue in Jorgensen II because the defendants had 'stopped paying plaintiffs the pro rata distribution from the corporation's cash flow while they continued to pay themselves regular distributions'" and therefore " 'they treated plaintiffs differently, and inequitably, when compared with the treatment accorded all other shareholders.'" Id., ¶ 27 (citing Jorgensen II, 246 Wis. 2d 614, ¶ 18).
¶ 88. In this case, Michael Vilione was the sole "beneficiary" of the embezzled funds and "there was never any intention for [Krier] to benefit in any way" from the money that was taken out of the corporation. See id. The funds that Michael Vilione took from EOG Environmental were not paid as compensation for his services to the corporation. Instead, it is alleged that they were misappropriated corporate profits. With Donald Vilione's assistance, Michael in essence put a check for over $1.2 million of the corporation's profits directly into his own pocket. Krier did not, and it was never intended that he would receive a corresponding share.
¶ 89. This case and Notz are in direct conflict. In Notz, one shareholder got a disproportionate financial benefit. It was as though one shareholder was able to put money in its pocket while another was not. The court concluded that because one shareholder did not receive the same financial benefit as the other, a direct claim could be maintained. In this case, Michael Vilione actually did put corporate money in his pocket, yet the majority concludes that Krier, who did not receive the benefit, has no direct claim. Ultimately, due to this conflict with Notz, the majority here confuses the law, giving practitioners and judges no real guidance.
*336Ill
¶ 90. The majority's analysis is further undermined when it repeatedly misstates the central allegations of the plaintiffs' complaint. Time and time again throughout the opinion, the majority states: "The complaint alleges that had the accountants informed the plaintiffs of the misappropriations, they would have ceased doing business with EOG Environmental." Majority op., ¶ 2; see also id. ¶¶ 10, 11, 15, 21, 48, 49, 51, 52, 67.
¶ 91. Nowhere in the complaint can you find the allegation as misstated by the majority. Instead the allegation the majority apparently relies upon provides that he would have discontinued his partnership with Michael Vilione:
Had Henry Krier been aware of the fact that defendant Vilione was assisting and conspiring with his brother Michael Vilione to misappropriate and convert money and fraudulently conceal the true financial state of the companies, then Mr. Krier would not have continued to employ defendants Vilione and Virchow Krause as accountants, nor would he have continued to associate with Michael Vilione as a business partner, nor would he have allowed the misappropriation and conversion of company monies.
Complaint ¶ 39 (emphasis added).
¶ 92. Indeed, that is exactly what Krier did in 2002 after he found out about the misappropriations. He discontinued associating "with Michael Vilione as a business partner." As set forth in the allegations of the complaint, he concluded that Michael Vilione was engaging in an illegal activity, embezzling money from the corporation as well as cheating on taxes.
*337¶ 93. The complaint alleges that Michael Vilione cheated the IRS by charging the corporation for a variety of personal expenses that were not deductible business expenses, including $98,502 for household expenses, $85,583 for family automobile expenses, another $182,608 for what appear to be more personal and household expenses, and an $11,000 partial payment on the purchase of a vacation home in Palm Springs, California. See complaint, ¶¶ 28, 30. If these allegations are true, it is no wonder that Krier no longer wanted "to associate with Michael Vilione as a business partner."
¶ 94. Krier, however, never alleged that he wanted to discontinue doing business with EOG Environmental. Quite to the contrary. At least for a period of time, his financial success was in part tied to having a continuing relationship with EOG Environmental.
¶ 95. In certain circumstances, the majority's misstatement may be nothing more than a minor error. Here, however, the majority misstates the allegation and then characterizes this misstated allegation as the "crux" of the plaintiffs' claim for damages: "The crux of the plaintiffs' claim for damages relates to the fact that they would have discontinued doing business with EOG Environmental had they known of the misappropriations." Majority op., ¶ 15.
¶ 96. Having denominated this misstated allegation as the "crux" of the plaintiffs' claim for damages, the majority then proceeds to build its entire damage analysis on this misstatement. The majority's analysis of damages is set forth in paragraphs 47-52. The misstated allegation appears in paragraph 48, twice in paragraph 49, and again in paragraphs 51 and 52.
¶ 97. The majority's analysis is but a house of cards that must fall because it misunderstands the *338"crux" of the plaintiffs' argument and builds its analysis on a foundation of repeated misstatement.
IV
¶ 98. Finally, the majority's lengthy discussion obfuscates what is really at issue in this case. Instead of focusing its discussion on the issue presented, the majority reaches out and raises all manner of issues not found in the parties' briefs — resolving them all in favor of the defendants.
¶ 99. As Chief Justice John Roberts has stated, a judge's job is like an umpire's — "to call balls and strikes, and not to pitch or bat."6 The majority should focus on calling the pitch that the defendants have thrown and keep off the playing field.
¶ 100. The majority has determined that because the plaintiffs are not current shareholders of EOG Environmental, they cannot assert a derivative claim. Thus, the issue presented is whether they have standing to bring a direct claim against the accountants. This was the issue that the defendants argued in their motions for partial summary judgment and the issue that defendants raise in their briefs to this court.
¶ 101. Nevertheless, the majority reaches out and decides the following issues:
1. A fiduciary duty can be limited in scope by public policy considerations, majority op., ¶ 37 — not briefed.
*3392. The negligence claims must be precluded on public policy grounds, id., ¶¶ 54-57 — not briefed.
3. The breach of fiduciary duty claim is barred under the statute of limitations for intentional torts, id.
¶ 58 — not briefed.
Curiously, the majority adds a footnote indicating that it is applying the bar and dismissing the claim without any consideration of an essential part of the analysis — the discovery rule. See id., ¶ 58, n.16.
4. "[T]he summary judgment record is devoid of anything that would support" the allegations that the defendants "concealed and conspired with Michael Vilione to misappropriate funds from EOG Environmental and that they fraudulently represented the financial status of the corporations," id., ¶ 61 — not briefed.
5. Defendants did not breach a fiduciary duty to disclose information to the plaintiffs, id., ¶¶ 62-67— not briefed.
¶ 102. I do not weigh in on the unbriefed issues that occupy so much of the majority's attention. Opinions of this court should not "reach out and decide issues that were not presented to the court by the parties." Dairyland Greyhound Park, Inc. v. Doyle, 2006 WI107, ¶ 335, 295 Wis. 2d 1, 719 N.W.2d 408 (Roggensack, J., concurring in part and dissenting in part).
¶ 103. For the reasons set forth above, I respectfully dissent.
¶ 104. I am authorized to state that CHIEF JUSTICE SHIRLEY S. ABRAHAMSON joins this dissent.
*343¶ 7. ANN WALSH BRADLEY, J., did not participate.

 2009 WI 30, 316 Wis. 2d 640, 764 N.W.2d 904.

 The majority specifically discusses the breach of fiduciary duty claims and the negligence claims, see majority op., ¶¶ 53-67, but it fails to specifically address others. It is not clear what happens to the remainder of these interrelated claims. For instance, it is difficult to see how the majority's analysis provides a legal basis for dismissing the plaintiffs' claim that the defendants violated the Wisconsin Organized Crime Control Act.

 The majority correctly quotes from Fletcher that "generally," misappropriation gives rise to derivative actions only. See majority op., ¶ 31 (citing 12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations §§ 5911, 5913, 5924 (perm. ed., rev. vol. 2009)). However, it fails to set forth additional quotes from Fletcher that undermine its conclusion: "A shareholder may sue to redress direct injuries to him or herself regardless of whether the same violation injured the corporation." 12B Fletcher, supra, § 5911. 'While the misappropriation ... of corporate property or assets ordinarily generates a claim in the corporation or derivatively in its shareholders, minority shareholders may have an individual cause of action in an appropriate case for damages that they alone have sustained, as where majority shareholders have profited but plaintiff minority shareholders have been wronged by a fraudulent sale of corporate assets." Id. § 5924.

 The majority takes issue with this statement, labeling it "hogwash." See majority op., ¶ 31, n.13. Such a response lends credence to the old adage, "When you have the law on your side, argue the law; when you have facts on your side, argue the facts; and when you have neither, holler." The majority's hollering, however, is no substitute for analysis.
The majority never examines whether the injury inflicted harm on Krier that Michael Vilione did not suffer or whether it *333affected Krier's rights "in a manner distinct from the effect upon" Michael Vilione. Instead, in a conclusory fashion, the majority ultimately determines that "[h]ere the injury is to the corporation" because "injury from the embezzlement is to the corporation." See majority op., ¶¶ 31, 31 n.13.

I did not join the Notz majority, in part because I was unsure of what the court meant by the term "constructive dividend," as it was not defined in Notz or in any of our case law. However, if the term "constructive dividend" applied to the facts alleged in Notz, it is also applicable here.

 Confirmation Hearing on the Nomination of John G. Roberts, Jr., to be Chief Justice of the United States: Hearing Before the S. Comm, on the Judiciary, 109th Cong. 56 (2005) (statement of John G. Roberts), available at http://www.cnn.com/ 2005/POLITICS/09/12/roberts.statement/index.html.