Commercial Law

Banks – Fiduciaries – Bad Faith

Koss Corp. v. Park Bank, 2018 WI App 1 (filed 12 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: A bank did not act in bad faith when an account holder’s employee embezzled millions of dollars from a corporate account.

SUMMARY: An employee, Sachdeva, embezzled millions of dollars from her employer, Koss Corp. The theft involved, in part, Koss’s accounts at Park Bank. Koss later sued Park Bank, alleging it had violated its duties under the Uniform Fiduciary Act (UFA). The circuit court granted summary judgment in favor of Park Bank because there was no evidence it had acted in bad faith.

The court of appeals affirmed in an opinion authored by Judge Stark. Koss’s claim hinged on whether the bank acted in “bad faith” under the UFA, which freed banks from a common-law duty to ensure that fiduciaries properly handled fiduciary funds (see ¶ 21). Wisconsin Statutes section 112.01, part of the UFA, mandates that principals (such as Koss) must show that the bank had actual knowledge of the fiduciary’s breach, or that the bank acted in bad faith by paying a particular check (see ¶ 22).

To define “bad faith,” the court turned to case law from other jurisdictions, which emphasizes that a bank’s negligence is insufficient. The court of appeals concluded that bad faith under the UFA requires proof of two elements: “(1) circumstances that are suspicious enough to place a bank on notice of improper conduct by the fiduciary; and (2) a deliberate failure to investigate the suspicious circumstances because of a belief or fear that such inquiry would disclose a defect in the transaction at issue” (¶ 27).

Turning to the summary judgment record, the court held that Park Bank had presented prima facie evidence in its favor and that Koss had failed to raise a material issue of fact showing “bad faith” under the UFA (see ¶¶ 35, 49).

Criminal Law

Homicide by Intoxicated Use of a Vehicle – Affirmative Defense

State v. Raczka, 2018 WI App 3 (filed 20 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: In this prosecution for homicide by intoxicated use of a vehicle and reckless homicide, the circuit court erroneously issued a pretrial order preventing the defendant from introducing evidence to show that the incident occurred after he suffered a seizure at the wheel.

SUMMARY: While defendant Raczka was driving, his vehicle hit a tree and his passenger was killed. After blood tests revealed the presence of marijuana and cocaine, Raczka was charged with homicide by intoxicated use of a vehicle (causing death by operating a vehicle with a detectable amount of restricted controlled substance in the driver’s blood) and second-degree reckless homicide.

Pertinent to this appeal is the provision in the homicide-by-intoxicated-use statute that establishes an affirmative defense if the defendant “proves by a preponderance of the evidence that the death would have occurred even if he or she had been exercising due care and … did not have a detectable amount of a restricted controlled substance in his or her blood.” Wis. Stat. § 940.09(2)(a). The defendant sought to raise this defense and meet this burden by showing that the accident was caused by a seizure.

The state filed a motion in limine to prevent the defendant from presenting any evidence of a seizure, maintaining that he was negligent in failing to take his prescribed seizure medication. The circuit court agreed with the state and concluded that any evidence that the defendant had a seizure was inadmissible as a matter of law and a total bar to a defense under Wis. Stat. section 940.09(2)(a). The defendant sought leave to appeal this order, which the court of appeals granted.

In a decision authored by Judge Hagedorn, the court of appeals reversed the decision of the circuit court. It agreed that Wis. Stat. section 940.09(2)(a) offers no defense to the defendant if failing to take medication was negligent and this negligence caused the seizure and the crash. However, whether failure to take the medication was actually a failure to exercise due care is a question of fact to be decided by the jury; it cannot be presumed as a matter of law (see ¶¶ 14-15).

The court hypothesized a variety of situations in which a jury might find that the defendant was exercising due care even though he was not taking medication. In short, the jury is entitled to hear and weigh the defendant’s evidence; the circuit court’s order precluding him from presenting this evidence was erroneous.

The state also sought to exclude the seizure evidence with respect to the second-degree reckless homicide count. The appellate court disagreed. “In order to convict Raczka of second-degree reckless homicide, the State must prove that Raczka caused Bonsall’s death `by criminally reckless conduct.’ WIS JI – CRIMINAL 1060. Showing that the accident was caused by a seizure, and not criminally reckless conduct, tends to negate this element. The evidence is plainly relevant to the charge and admissible” (¶ 18).

Criminal Procedure

Investigative Detentions – Reasonable Suspicion – Consent

State v. Rose, 2018 WI App 5 (filed 13 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: The defendant was lawfully seized when a police officer asked him for consent to search his auto.

SUMMARY: A police officer discovered drugs in the defendant’s car. The circuit court found that the defendant was lawfully seized when the officer asked him for consent to search the vehicle.

The court of appeals affirmed in an opinion authored by Judge Gundrum. Several people had called 911 regarding the defendant’s earlier dangerous and erratic driving. A police officer confronted the defendant at a gas station while he pumped gas. Although the defendant passed certain field tests, the officer observed other evidence of impairment that sufficed to show the defendant was lawfully seized when he consented to the search of his car (see ¶ 20).

The facts showed that the officer had both reasonable suspicion and probable cause to investigate the defendant’s behavior. “Though this officer apparently did not recognize that he had probable cause, our constitutional inquiry asks what a reasonable officer in the position of this officer would have determined, not what this particular officer subjectively determined” (¶ 25). The facts showed that a “reasonable police officer would have been entirely justified in continuing the detention of Rose for investigation related to a drug-based violation” of the driving laws (¶ 28).

Sentencing – Credit for Time Served

State v. Johnson, 2018 WI App 2 (filed 13 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: The defendant was entitled to an additional three days of sentence credit for time served.

SUMMARY: The defendant pleaded guilty to several drug-related crimes. He requested credit for 33 days of time served, but the circuit court granted only 30 days. The trial judge stated that the defendant must serve more than “12 hours” to get credit for the day.

The court of appeals reversed in an opinion authored by Judge Gundrum. Three controlling cases supported the defendant’s claim to the three additional days, leaving the court with no “discernable, substantive basis for distinguishing this case” from those other cases. “[W]e conclude [defendant] is entitled to a day of sentence credit for each calendar day during which he spent at least part of the day in custody” (¶ 8).

Family Law

Termination of Parental Rights – Indian Child Welfare Act – Wisconsin Indian Child Welfare Act

Kewaunee Cty. Dep’t of Human Servs. v. R.I., 2018 WI App 7 (filed 28 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: The respondent father was not entitled to specified additional factfinding in the grounds phase of this termination of parental rights case by virtue of the Indian Child Welfare Act and the Wisconsin Indian Child Welfare Act.

SUMMARY: R.I. appealed an order terminating his parental rights to his daughter M.J., who is an Indian child. R.I. is not of Native American heritage. During the grounds phase of this termination of parental rights (TPR) action, the parties stipulated that R.I. had abandoned M.J. However, R.I. argued that before determining if grounds existed to terminate his parental rights, the circuit court was required to hold an evidentiary hearing to determine the likelihood of serious emotional or physical damage from his continued custody of M.J. and if any active efforts were made to prevent breakup of an Indian family. He contended that this additional factfinding was required by 25 U.S.C. § 1912(f) and (d), part of the Indian Child Welfare Act of 1978 (ICWA), and Wis. Stat. § 48.028(4)(e)1. and 2., part of the Wisconsin Indian Child Welfare Act (WICWA).

The circuit court granted partial summary judgment in favor of the Kewaunee County Department of Human Services after the court concluded that these provisions of ICWA and WICWA did not apply to R.I. In a decision authored by Judge Stark, the court of appeals affirmed the TPR order.

R.I. contended on appeal that the circuit court’s grant of partial summary judgment was erroneous because, under the provisions of ICWA and WICWA cited above, genuine issues of material fact existed regarding damage to M.J. from R.I.’s continued custody and whether active efforts were made to prevent breakup of the Indian family.

Rejecting these arguments, the court of appeals concluded that “25 U.S.C. § 1912(f) and (d) are inapplicable because R.I. never had custody of M.J. See Adoptive Couple v. Baby Girl, 570 U.S. ___, 133 S. Ct. 2552, 2560-63 (2013). We also reject R.I.’s argument that Wis. Stat. § 48.028(4)(e)1. and 2. apply to him regardless of his lack of custody and conclude WICWA does not establish a higher level of protection for R.I.’s parental rights than ICWA” (¶ 2).

Insurance

Insufficient Funds – Pro Rata Distributions – Accord and Satisfaction – Direct Action

Lovelien v. Austin Mut. Ins. Co., 2018 WI App 4 (filed 27 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: Because the insurance policy limits were plainly inadequate to compensate all claimants, the insurer’s deposit of the remaining funds with the court following a partial settlement did not constitute “accord and satisfaction” nor violate the direct-action statute.

SUMMARY: Three people were killed and two injured in an automobile collision. One vehicle was covered by a commercial automobile policy with limits of $500,000. This insurer, Austin Mutual, settled with two claimants and deposited the remaining limits with the court. The circuit court approved the settlements and dismissed Austin Mutual from the case.

The court of appeals affirmed in an opinion authored by Judge Seidl. First, accord and satisfaction did not moot this appeal despite the insurer having deposited its limits with the court. The payment came pursuant to a court order; the claimant neither requested nor accepted it.

Second, the insurer’s payment into the court did not violate the direct-action statute. See Wis. Stat. § 632.24. “Nothing in the language of the statute mandates that a distribution be ‘pro rata’ or ‘based on the amount of damages that injured persons are entitled to recover against the insured’ when the policy limits are insufficient to satisfy all claimants” (¶ 16). In short, the statute is silent on how such funds are distributed. It is the legislature that must determine the appropriate public policy (see ¶ 20).

Finally, the court distinguished Wondrowitz v. Swenson, 132 Wis. 2d 251, 392 N.W.2d 449 (Ct. App. 1986), a case involving “postverdict pro rata distribution of insufficient policy limits” (¶ 22). “Until such time as there was a verdict in this case, Austin Mutual’s policy limits were not subject to the circuit court’s control and neither the direct action statute nor Wisconsin case law required Austin Mutual to distribute its policy limits in settlement on a pro rata basis” (¶ 23).

Native American Tribal Sovereignty

Tribal Sovereign Immunity – In Personam Claims – In Rem Claims

Wisconsin Dep’t of Natural Res. v. Timber & Wood Prods. Located in Sawyer Cty., 2018 WI App 6 (filed 19 Dec. 2017) (ordered published 31 Jan. 2018)

HOLDING: Tribal sovereign immunity barred the Department of Natural Resources (DNR) from bringing the in personal and in rem actions that are the subjects of this lawsuit.

SUMMARY: The DNR has attempted to recover taxes that it claims are owed by the Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin (the Tribe) under Wisconsin’s forest croplands law. See Wis. Stat. § § 77.01-17. Participation in the forest croplands program, which was established in 1927, confers substantial tax benefits on the participants in exchange for their agreement to abide by articulated forestry practices.

The Tribe, a federally recognized Indian tribe, acquired property in Sawyer County that was already enrolled in the forest croplands program. When the real estate’s enrollment in the program came to a natural conclusion upon the expiration of its forest croplands contract, the Tribe did not enroll the real estate in the managed forest program (a successor to the forest croplands program).

The DNR then filed suit naming the Tribe and the timber and wood products located on the covered real estate as defendants. The DNR sought a money judgment against the Tribe for a termination severance tax, which is imposed if real estate enrolled in the forest croplands program is not enrolled in the new managed forest program. It also sought a judgment of replevin entitling it to possession of the timber and wood products on the Tribe’s real estate enrolled in the forest croplands program.

The Tribe moved to dismiss the action, asserting its sovereign immunity barred the DNR’s claims. In response, the DNR argued the Tribe had waived its sovereign immunity by executing transfer-of-ownership forms indicating the Tribe agreed “to comply with the terms of the Forest Crop Law and the contract applicable to the said lands.”

In the alternative, the DNR argued that, even if the Tribe’s sovereign immunity barred the DNR from asserting in personam claims against the Tribe, sovereign immunity did not bar the DNR’s in rem claim seeking possession of the timber and wood products located on the Tribe’s real estate. The circuit court rejected both arguments and dismissed the DNR’s claims.

In an opinion authored by Judge Stark, the court of appeals affirmed. “Suits against Indian tribes are barred by sovereign immunity absent a clear waiver by the tribe or congressional abrogation” (¶ 18). “A strong presumption exists against waiver of tribal sovereign immunity” (¶ 19). Courts throughout the country have repeatedly held that a tribe’s mere agreement to comply with a particular law does not amount to an unequivocal waiver of the tribe’s sovereign immunity (see ¶ 21).

The court rejected the DNR’s argument that, by agreeing to comply with the forest croplands law, the Tribe agreed that it could be sued in state court to collect the termination severance tax or to enforce the statutory lien on the timber.

Having rejected the DNR’s argument that the Tribe waived its sovereign immunity, the court further concluded that, “in addition to barring in personam claims against the Tribe, the Tribe’s sovereign immunity prevents the DNR from bringing an in rem claim pertaining to the timber and wood products located on the Tribe’s property” (¶ 1).