Has the Wisconsin Court of Appeals Shown A Path to Change Successor Liability Law?

Published by Jeffrey A. Mandell, Kurt M. Simatic on | Permalink

Ordinarily, an appellate court’s per curiam opinion—an unsigned ruling issued “by the court” rather than in the name of the authoring judge—does not merit close examination. In Wisconsin, per curiam opinions are unpublished and may not be cited in future cases, even for persuasive value.

Thus, it would be easy to overlook the court of appeals’ recent per curiam opinion in Veritas Steel, LLC v. Lunda Construction Company. At first blush, the decision appears to be a straightforward affirmance of the circuit court’s order dismissing two claims: successor liability and fraudulent transfer. However, the analysis is illuminating, and it seems to telegraph—pretty clearly—that the Wisconsin Supreme Court should reconsider long-standing precedent that narrows the exceptions to the general law of non-liability for corporate successors.

Facts:

PDM was a steel fabricating entity. It had a credit agreement with multiple lenders, who in turn had first-priority liens on PDM’s assets. When PDM defaulted, the lenders granted forbearance in exchange for PDM’s agreement to sell itself with the help of an investment bank. None of the bids to acquire PDM were sufficient to cover PDM’s outstanding debt to secured creditors (much less to unsecured creditors like Lunda, which had obtained a $16 million judgment against PDM).

Atlas, the common parent company of the lenders, was the highest bidder. Through a series of transactions, Atlas and the lenders acquired PDM’s assets and shed any obligations to pay additional debts. They did this in several steps. First, a “transition support agreement” between PDM and the lenders expressed “a mutual desire” to transition PDM’s business to the lenders. In the wake of that agreement, Atlas and its affiliates purchased all of PDM’s outstanding debt directly from the lenders at a steep discount. Then Atlas created a new entity, Veritas Steel, which was assigned a first-priority lien on PDM’s assets. Finally, PDM conveyed its assets to Veritas in exchange for the discharge of the secured debts. “Under Veritas’s ownership,” PDM continued operating as it had before these transactions, employing the same workforce and pursuing the same type of work.  See slip op. ¶13.

Meanwhile, Lunda took steps to execute its judgment against PDM. Eventually, Veritas responded by seeking a judicial declaration that Lunda had no claim against Veritas for payment of the judgment against PDM. Lunda counterclaimed against Veritas and brought a third-party complaint against Atlas and others. Lunda alleged that the defendants schemed to control PDM and continue to operate it, “albeit under a different name.” Id. ¶ 15. Applying Wisconsin precedent, the circuit court dismissed Lunda’s successor liability and fraudulent transfer claims.

Court of Appeals decision:

In its discussion of the successor liability claim, the court of appeals began with the general rule that when an acquiring corporation purchases assets of a target corporation it does not also succeed to the liabilities of the target corporation. There are well-recognized exceptions to this general rule, two of which Lunda invoked: (1) the “de facto merger exception,” which applies when the transaction amounts to a consolidation or merger of the two corporations, and (2) the “mere continuation exception,” which applies when the acquiring corporation is essentially a continuation of the target corporation.

The court of appeals recognized that earlier precedent supported Lunda’s argument. In Tift v. Forage King Industries, the Wisconsin Supreme Court expanded these exceptions and allowed piercing the corporate veil so that a court could “look to the substance and effect of business transformations or reorganizations to determine whether the original organization continues to have life or identity” in a subsequent organization. Id. ¶24 (quoting Tift, 108 Wis. 2d 72, 78–79, 322 N.W.2d 14 (1982)).

However, the court of appeals concluded that later Supreme Court precedent cut the other way. This newer precedent, Fish v. Amsted Industries, Inc., rejected “relaxation of the traditional test of successor liability and instead requires attention to concrete evidence of identity of ownership.” Id. ¶27 (citing Fish, 126 Wis. 2d 293, 300–02, 376 N.W.2d 820 (1985)). As the court of appeals noted, this focus on the “identity of ownership” appears to require a transfer of stock to trigger the de facto merger exception, and the common identity of officers, directors, and stockholders for the mere continuation exception. As neither key element was present here, neither exception applied and Lunda’s successor liability claim failed.

The court of appeals cited federal case law that similarly understood Fish to foreclose claim, even where the results may be “‘unsettling’ because an asset transfer has occurred under what appear to have been ‘quite cozy’ circumstances.” Id. ¶28 (quoting Gallenberg Equip., Inc. v. Agromac Int’l, Inc., No. 98-3288, slip op. at 5 (7th Cir. Aug. 4, 1999)). The court of appeals also observed that Lunda’s argument would have “traction” in other jurisdictions, but not in Wisconsin “at this time.” Id. (emphasis added). And the court of appeals cautioned that it may be “impossible to square our reading of Fish with statutory merger language under ch. 180” of the Wisconsin Statutes. Id. ¶32, n.11. Finally, the court of appeals noted that Fish was a closely decided case, from which three justices dissented, “urging more flexible approaches to the exceptions.” Id. ¶33. But the court of appeals ultimately acknowledged its hands were tied, as only the Supreme Court can overrule its prior decisions.

Conclusion:

It may very well be that the court of appeals deemed this an open-and-shut case, meriting no more than an unsigned ruling. It may also be true that the court of appeals felt aggrieved by an unsecured judgment creditor getting the short end of the stick and went out of its way to explain why it could not offer relief. However, given the tone, the length, and the word choice of this opinion, the court of appeals may indeed have been urging litigants to ponder, and perhaps even providing rhetorical ammunition to use in, pursuing a change in the controlling precedent by seeking further review at the Wisconsin Supreme Court.

Wisconsin Issues Emergency Rule Implementing Wayfair Requiring Internet Sellers to Collect Sales Tax

Published by Richard Latta on | Permalink

             On September 6, 2018, the Wisconsin Department of Revenue (“WDOR”) issued Emergency Rule 1819 requiring out-of-state internet sellers to collect and remit Wisconsin sales taxes if the seller’s sales or number of transactions exceed the substantial nexus thresholds upheld by the U.S. Supreme Court in its June 21, 2018 decision in South Dakota v. Wayfair, Inc., et al.  The WDOR’s emergency rule becomes effective on October 1, 2018, meaning that internet sellers may need to start collecting sales taxes as soon as October 1, 2018 and filing sales tax reports and remitting sales taxes as soon as November 2018.

            The WDOR’s position is current Wisconsin Statutes § 77.51(13g)(c) permits the emergency rule to become effective on October 1, 2018 without action of the Legislature.  As noted in the comments to the emergency rule, if an internet seller of tangible personal property did not have nexus prior to Wisconsin implementing the Wayfair standard for substantial nexus, then Wisconsin will not seek to cause the seller to collect and remit Wisconsin sales or use taxes for sales prior to October 1, 2018.

            As to Wisconsin franchise and income taxes, the emergency rule expressly notes that internet sellers with substantial nexus for sales and use tax applying the Wayfair thresholds may also have substantial nexus in Wisconsin for imposing Wisconsin franchise and income tax.  While not stated, P.L. 86-272 (a 1959 federal law providing that a state is not permitted to impose a tax measured by net income on an out-of-state company if orders for tangible personal property are solicited in the state and then accepted or rejected, and filled, from outside the state) continues to limit Wisconsin’s ability to assert substantial nexus for franchise or income tax purposes regarding sales of tangible personal property.

            Similar to Wayfair, in the emergency rule Wisconsin adopted a small out-of-state retailer rule providing that retailers who have sales that do not exceed $100,000 (which $100,000 is inclusive of both taxable sales and sales exempt from tax) and annual transactions of less than 200 are not required to collect and remit sales taxes to Wisconsin.  For purposes of what “year” a retailer uses when determining whether the $100,000 of sales and 200 transactions thresholds are exceeded, it is the retailer’s taxable year for federal income tax purposes.

            Under the emergency rule, if an out-of-state retailer’s annual gross sales into Wisconsin exceeds $100,000 in the “previous year,” or if the retailer’s annual number of separate sales transactions into Wisconsin is 200 or more in the previous year, the retailer is required to register and collect Wisconsin sales or use tax for the entire current year.  An example in the emergency rule describes an out-of-state retailer that has more than $100,000 in gross sales in 2018 and so for the entirety of 2019 the retailer is required to collect and remit Wisconsin sales or use taxes. 

            By a separate webpage uploaded onto the WDOR website on September 10, 2018 (captioned “Registration and Collection Dates for Remote Sellers”), the WDOR answered a question left open by the emergency rule, which is if an out-of-state retailer had more than $100,000 of sales for 2017, or 200 or more transactions in 2017, is the out-of-state retailer required to collect and remit Wisconsin sales or use taxes for sales beginning October 1, 2018?  That is, when the emergency rule refers to “previous year” do 2017 sales count for determining the obligation to collect and remit taxes beginning on October 1, 2018?

            The WDOR takes the position on its website page that if an out-of-state retailer exceeds either the $100,000 sales/200 transactions thresholds in 2017, then the retailer needs to register and collect Wisconsin sales taxes beginning on October 1, 2018.  See Example 1.  Similarly, if from January 1, 2018 to September 30, 2018 an out-of-state retailer exceeds either the $100,000 sales/200 transactions thresholds, then the retailer needs to register and collect Wisconsin sales taxes beginning October 1, 2018.  See Example 3.  While not necessarily the outcome one may infer from the emergency rule, there is little impediment from the WDOR taking the position on its website.

            If an out-of-state retailer’s annual gross sales into Wisconsin are $100,000 or less in the previous year, and separate sales transactions into Wisconsin is less than 200 in the previous year (where each periodic payment constitutes a “sale”), then according to the emergency rule the retailer is not required to collect and remit taxes until its sales or transactions exceed the $100,000 or 200 transactions thresholds for the current year.  Once having exceeding the thresholds, a retailer is required to collect and remit taxes for the remainder of the year.  The emergency rule provides a clarifying example showing how once a retailer has exceeded the $100,000 of sales, or the 200 or more transactions, thresholds then the obligation to collect and remit sales and use tax begins with the retailer’s next sale transaction. 

           In terms of implementing reporting and registration, Wisconsin is one of the 24 states that have adopted the Streamlined Sales and Use Tax Agreement (SSUTA) and is a “full member” of the Streamlined Sales Tax Governing Board.  So registration, reporting and software are available through the Streamlined Sales Tax Governing Board’s website.  Based on conversations with WDOR personnel, the use of the Streamlined Sales Tax Governing Board processes, SSUTA and certified software providers listed on the Streamlined Sales Tax Governing Board’s website are the method by which the emergency rule will have negligible costs to the private sector (and the emergency rule says “This proposed rule does not have anticipated costs on the private sector.”).

            While Wisconsin has now clarified that internet sellers that exceed the $100,000 in sales and 200 transactions thresholds of Wayfair are required to collect and remit Wisconsin sales tax, it is yet unclear whether Wisconsin will seek to expand what constitutes “substantial nexus” for sales/use taxes, and franchise/income taxes.  Based on tax audit experiences of the author, it will not be surprising if the WDOR seeks to expand substantial nexus by looking at economic nexus, click-thru nexus, “cookie” nexus and notice requirements to broaden the base of Wisconsin taxpayers.  The WDOR already has audit office presence in states outside of Wisconsin to facilitate audits to expand the number of businesses subject to Wisconsin tax.  The WDOR has a voluntary disclosure program (VDP), as to which Wisconsin’s policy is to collect four years’ taxes where a VDP has been implemented, if a VDP is entered into by a taxpayer.  Businesses that are on the cusp of meeting substantial nexus in Wisconsin may want to consider availing themselves of the VDP process.

            Comments on the emergency rule may be submitted to the WDOR no later than a to be announced date for a public hearing regarding the emergency rule.  When information as to the place, date and time of the public hearing is published in the Wisconsin Administrative Register, this article will be updated to provide the deadline for comments.

Conclusion 

            The emergency rule announced by the WDOR leaves internet sellers with little time to implement collection and remitting processes to comply with the new rule.  While the emergency rule assists in harmonizing Wisconsin’s sales and use tax nexus thresholds with other states that adopt the Wayfair thresholds for substantial nexus, Wisconsin’s timeline for implementation of the emergency rule places a significant decision burden (e.g., start collecting sales tax in Wisconsin on October 1, 2018) and may place a procedural burden on internet sellers.