June 11, 2009 – A divided Wisconsin Supreme Court denied standing to a plaintiff arguing that his business was negatively affected by wrongdoing at another corporation in Krier v. Vilione, 2009 WI 45.

Henry J. Krier and Michael Vilione had founded three separate but interrelated companies involved in waste disposal: EOG Environmental, EOG Disposal, and Vil-Kri.

Krier alleged that Michael Vilione improperly took funds from EOG Environmental for himself.   Krier further charged that EOG Environmental’s accountant, Vilione’s brother Donald, knowingly falsified the accounting records to cover this up. In 2003, Krier sued Michael Vilione, but then reached a settlement by which Krier took full ownership of EOG Disposal and Vil-Kri. Michael Vilione became the sole owner of EOG Environmental.

Vilione and Krier agreed to continue a business relationship between their companies for the next two years. Krier also reserved the right to sue Donald, which he did in 2005.

Krier charged that if Donald and his accounting firm had informed him of the misappropriations from EOG Environmental or had stopped the withdrawals, he and his corporate entities would have ceased to do business with EOG Environmental. Krier offered an expert’s opinion that his businesses would have produced greater income in the years following the settlement but for the misappropriated funds from EOG Environmental.

Limiting principle of corporation law

At the trial court, the defendant accountants successfully moved for summary judgment, arguing that only EOG Environmental or its current shareholders had standing to assert claims for alleged embezzlement of EOG Environmental funds.

In a majority opinion authored by Justice Annette Kingsland Ziegler, the supreme court agreed.

“Standing” is a concept that restricts access to judicial remedy to those who have suffered some injury because of something that someone has either done or not done, the court explained. “Being damaged, however, without more, does not automatically confer standing,” the court added.

Krier’s claims to standing are foreign to Wisconsin corporate law, the court held. “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,” the court said.

Further, the court said Krier’s alleged injuries were actually suffered by EOG Environmental, not him or his businesses. “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,” the court stated.

Because Krier is not a current shareholder of EOG Environmental, he lacks standing to sue, the court said. And even if he were a current shareholder, the court added, Krier would only be able to sue in the name of the corporation to recover on its behalf – not in his own capacity. The court noted that Krier might have prevented his current problems if he had simply filed that derivative suit against Michael Vilione while he was still a shareholder of EOG Environmental.

Applicability of a derivative suit

In dissent, Justice Ann Walsh Bradley, joined by Chief Justice Shirley Abrahamson, disputed the majority’s conclusion that only a derivative suit could address Michael Vilione’s behavior.

At the outset, the dissenters did not agree with the majority’s view that the harms claimed by Krier and his businesses are actually those of EOG Environmental.

But even if they were, the dissenters continued, a shareholder’s recourse should not be limited to seeking recovery for the corporation. Bradley cited the test for determining whether an injury is “primarily to the corporation” or to an individual shareholder found in Jorgenson v. Water Works, Inc., 200 WI App 135. Michael Vilione’s alleged embezzlement came at the direct expense of Krier’s shareholder rights and the value of his investment in their enterprise, Bradley concluded.

“Hogwash,” the majority responded to the dissenters. “When corporate funds are misappropriated, the injury to the corporation is the primary injury even though shareholders suffer from those misappropriations.”

Quoting from Fletcher Cyclodpedia of the Law of Corporations, the majority wrote, “In order for a shareholder to have an independent claim, the injury must be ‘one to the plaintiff as a shareholder as an individual, and not to the corporation[;] for example, where the action is based on a contract to which the shareholder is a party, or on a right belonging severally to the shareholder, or on a fraud affecting the shareholder directly, or where there is a duty owed to the individual independent of the person’s status as a shareholder.’”

The dissenters charged that the majority was not following its own precedent in Notz v. Everett Smith Group, Ltd., 2009 WI 30. In Notz, the court found that when a “constructive dividend” is given to just some shareholders, a deprived individual shareholder could bring a direct claim.

“To be clear, there were no actual ‘dividends’ paid in Notz,” Bradley wrote. “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 … 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.”

“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,” Bradley concluded. “This case and Notz are in direct conflict.”

The majority denied any conflict.

“Our decision is not inconsistent with Notz because acting shareholders have a right to dividends paid on a pro rata basis equivalent to their ownership of corporate stock. Embezzlement, however, is distinguishable from a dividend,” the majority responded. “An injury from not receiving a dividend is to the shareholder. The injury from the embezzlement is to the corporation. A misappropriation is not a constructive dividend.”

Corporate principles govern

Krier asked the justices to find standing by looking past the three separate entities he and Michael Vilione formed to see that they actually function as a single business, but the court refused.

“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,’” the court said, quoting Fletcher.

Accountant liability

Krier unsuccessfully argued that the accountants breached an independent duty owed to him.

“In order for an accountant to bear responsibility to a third party, the third party must have done something to its detriment based upon the accountant’s information,” the court stated, drawing a contrast between the facts of this case and those in Citizens State Bank v. Timm, Schmidt & Co., S.C., 113 Wis 2d 376 (1983), and Chevron Chemical Co. v. Deloitte Touche, 168 Wis. 2d 323 (Ct. App. 1992).

The accountants in Citizens and Chevron prepared documents knowing that third party creditors would reasonably rely on them to assess their borrowers’ financial condition. “Here, there is no such claim that the plaintiffs took action in reliance on information provided by the accountants,” the court said.

Disputed damages

The court doubted the basis of Krier’s calculated damages.

“The plaintiffs claim that they would have ceased doing business with EOG Environmental had they known of the misappropriations and that the accountants shirked their responsibility in not warning them of the misappropriations,” the court wrote. “However, the plaintiffs contracted to do business with EOG Environmental for two years after knowing about the misappropriations. Now they wish to recover from another for that knowing and voluntary choice.”

In dissent, Bradley wrote that the majority “misstated” Krier’s allegation and, consequently, its analysis of the damages claim “is but a house of cards that must fall because it misunderstands the ‘crux’ of the plaintiff’s argument.” Krier did not want to remain Michael Vilione’s business partner, given the many allegations of embezzlement and tax cheating against him, Bradley explained.

“Krier, however, never alleged that he wanted to discontinue doing business with EOG Environmental,” Bradley stated. “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.”

Other grounds to dismiss

The majority opinion discussed other bases to dismiss Krier’s claims, including public policy consideration.

In dissent, Bradley chastised the majority for “its unbridled tendency to reach out and decide issues not briefed in this case.”

“I do not weigh in on the unbriefed issues that occupy so much of the majority’s attention,” Bradley wrote.

Quoting Dairyland Greyhound Park, Inc. v. Doyle, 2006 WI 107, Bradley wrote, “Opinions of this court should not ‘reach out and decide issues that were not presented to the court by the parties.’”