Nov. 21, 2016 – The 50/50 shareholders of a failed business owed more than $450,000 in debt obligations. Both settled separately with the lending bank. Recently, an appeals court ruled that one owner was not entitled to equitable contribution from the other.

The appeals court held that when examining whether a co-guarantor has paid more than half his or her fair share of a common debt, courts must determine whether the guarantor paid more than half the debt, not more than half of settlement amounts.

In this case, European Motor Works LLC (EMW) borrowed almost $380,000 from M&I Bank. Scott Smith and Gregory Kleynerman owned EMW together and both were personally liable for the debt. After EMW defaulted, the bank sued to collect on the debt.

Kleynerman filed for bankruptcy. Thus, the bank moved for summary judgment against Smith and EMW only. The circuit court ruled that Smith and EMW owed about $471,000, including attorney’s fees and costs. Smith then settled with the bank.

Smith forfeited personal property, almost $200,000 worth of stock and a $40,000 lien on his home in Minnesota. The bank then settled with Kleynerman for $10,000 in cash.

Smith filed a cross claim for contribution against Kleynerman. He argued that Kleynerman should contribute half of the combined settlement amounts.

The trial court concluded that Kleynerman did not receive a benefit from Smith’s settlement with the bank and dismissed the cross-claim for contribution.

In BMO Harris Bank, N.A. v. European Motor Works, 2015AP924 (Nov. 8, 2016), a three-judge panel for the District I Appeals Court affirmed, for different reasons, but ruled that Kleynerman might have to pay half of EMW’s attorney’s fees.

The panel explained that when a co-guarantor pays more than a fair share of a common obligation, he or she may have a contribution claim against the other co-guarantor.

The panel agreed that Smith and Kleynerman were liable for the same debt obligation, because both signed the promissory note to M&I Bank (BMO Harris Bank purchased M&I Bank while the case was pending).

“[They] both signed guarantees holding each of them personally liable for EMW’s debts and obligations under the Note,” wrote Judge Patricia Curley. “Thus, because the guarantees Smith and Kleynerman signed secured the same debt – regardless of whether they signed the same document – they are liable for the same obligation.”

However, the panel also ruled that Smith did not pay more than his fair share of the obligation, even though Smith settled for a much greater amount than Kleynerman.

That’s because the court looks at fair share “based on the total outstanding obligation,” not the amounts the respective parties paid to settle the debt.

“We agree with Kleynerman that the proper analysis under these circumstances is based upon the total outstanding obligation rather than the total amount paid to settle the obligation,” wrote Judge Curley.

No Wisconsin cases address how courts should determine fair share when co-guarantors negotiate separate settlements for less than half the amount owed, the panel noted. Kleynerman cited foreign authority, and the panel found it persuasive.

In Rhode Island, for instance, two business partners were 50/50 shareholders that borrowed $1 million. Both settled separately with the bank, paying different amounts.

The shareholder who paid more sought contribution from the other, claiming he paid more than half of the combined settlement amounts. But the Supreme Court of Rhode Island ruled that contribution is only warranted if one co-guarantor pays more than half of the full debt obligation, here $1 million, not more than half of the settlement amounts.

An appeals court in Minnesota came to the same conclusion: the fair share analysis looks at the amount of the outstanding obligation, not the amount of settlements.

“[W]e likewise conclude that where two or more parties are liable for the same obligation and each party obtains a settlement and release only on his or her own behalf, the fair share calculation is based on the total amount of the outstanding obligation,” Judge Curley wrote.

On the issue of attorney’s fees, the appeals court panel reversed, concluding that Smith could be entitled to attorney’s fees incurred for work on behalf of EMW, the business.

The panel remanded to determine if either party “is entitled to summary judgment on Smith’s claim for contribution for attorney’s fees Smith paid solely on behalf of EMW.”