Court Must Adjudicate the Merits before Transferring Properties to Trust Over Owner’s Objection

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In City of Milwaukee v. Choudry, 2018AP1693 (Dec. 27, 2019), the Wisconsin Court of Appeals reversed a circuit court order transferring the defendant’s properties into a trust. The appellate court held that, because the trial court never made a final judgment on the merits of the case, it lacked authority to impose a remedy.

Starting in 2002, Mohammad Choudry, personally and through several business entities, purchased 93 properties in the City of Milwaukee. These properties accumulated over $400,000 in delinquent property taxes and nearly 3,000 municipal code violations (triggering more than $240,000 in fines). Three years ago, the City filed a lawsuit against Choudry seeking to declare his properties a public nuisance, to collect monies owed, and to fix outstanding code violations.  

Among other steps, the City asked the court to appoint a receiver for the properties, who would manage them and bring them into compliance with the law. The circuit court issued a temporary injunction prohibiting Choudry from acquiring more property. It also appointed a receiver to manage Choudry’s existing properties. For approximately one and one-half years, the receiver worked with Choudry and regularly consulted with the court regarding management of the properties, payment of the delinquent taxes, and efforts to remediate the code violations.

In May 2018, the receiver filed a motion to transfer the properties into a trust controlled by the receiver. The receiver asserted that it would take several more years to finish paying back taxes, cleaning up the properties, and paying all expenses. A trust would allow this process to continue without the court’s involvement. When the taxes on all of the properties were up to date, ownership of the properties would revert to Choudry.

Choudry objected. He noted that the case had not been litigated on the merits—that is, he never had the opportunity to put on a defense—and transferring the properties into a trust would merely release the receiver, not resolve the dispute. The circuit court disagreed, asserting that “the record reflected that the ‘allegations’ of the City had been proven in the reports filed by … the receiver.” Choudry, slip op., ¶18. On that basis, the circuit court granted the receiver’s motion. The City then made, and the court granted, a motion to dismiss the case.

Choudry appealed, and the court of appeals reversed.

The court of appeals held that the circuit court lacked authority to transfer Choudry’s properties into a trust. Although Wis. Stat. § 813.16 empowers a court to appoint a receiver, it does not authorize other remedies. Choudry, slip op., ¶21. The appellate court then distinguished the case on which the receiver relied, Beloit Liquidating Trust v. Grade, 2004 WI 39, 270 Wis. 2d 356, 677 N.W.2d 298; while that case did involve a trust created without a final judgment, the case also involved a reorganization plan approved by the bankruptcy court—the equivalent of a final judgment. Choudry, slip op., ¶22.

Nor could the circuit court use its inherent equitable authority to create a trust in these circumstances. Wis. Stat. § 701.0401(4) authorizes circuit courts to equitably create a trust, but only in response to a legal wrong. Choudry, slip op., ¶24 (citing Breier v. E.C., 130 Wis. 2d 376, 389, 387 N.W.2d 72 (1986)). Here, because the trial court made no final determination of legal wrongdoing, it had no authority to transfer Choudry’s properties into a trust. Choudry, slip op., ¶¶25-26.

The appellate court reversed the dismissal and remanded the case with instructions that the transfer to the trust be unwound, with the receivership restored and the trial court to conduct further proceedings. Id., ¶27.

For municipalities and courts, nuisance properties present unique challenges. The Choudry decision makes clear that in nuisance actions, as in any other litigation, a court must reach a final judgment on the merits before it can grant certain remedies.

Towns Can Still Enforce Some Shoreland Frontage Requirements

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In State of Wisconsin ex rel. Michael Anderson v. Town of Newbold, 2018AP547 (Oct. 29, 2019), the Wisconsin Court of Appeals, District III, recently upheld a minimum-shoreland-frontage requirement adopted under a town’s subdivision authority, even though an identical requirement could not be validly adopted within the town’s zoning authority.

Michael Anderson owns a lot with 358.43 feet of shoreland frontage in the Town of Newbold. When he sought in 2016 to split the property into two lots, the Town Board denied his request. The Town Board reasoned that the property did not have sufficient total shoreland frontage for each of the proposed lots to satisfy a subdivision ordinance, which requires a minimum of 225 feet of shoreland frontage for each lot. After the circuit court upheld the Town Board’s decision on certiorari review, Anderson appealed.

The court of appeals acknowledged that there is a tension between inconsistent statutes on zoning and subdivision authority. Wis. Stat. § 59.692 prohibits towns from enacting shoreland zoning regulations. Anderson, slip op. at ¶11. However, the Wisconsin Supreme Court has also recognized that Wis. Stat. § 236.45 provides independent authority “to enact subdivision control regulations.” Anderson, slip op. at ¶12 (citing Town of Sun Prairie v. Storms, 110 Wis. 2d 58, 70, 327 N.W.2d 642 (1983)).

The court of appeals considered the critical question to be whether the Town’s subdivision ordinance was authorized by Chapter 236, not whether the ordinance could also be considered zoning. Anderson, slip op. at ¶16 (citing Town of Sun Prairie, 110 Wis. 2d at 70-71). Anderson, however, focused on the similarities between the Town’s subdivision ordinance and a zoning ordinance. Id. at ¶14. Anderson did not argue that the ordinance was improper under Chapter 236. Accordingly, the court seized upon Chapter 236 in rejecting Anderson’s claim that the Town lacked authority to adopt the minimum-frontage requirement in its subdivision ordinance. Id. at ¶16.

The court of appeals also rejected Anderson’s invitation to treat Wis. Stat. § 59.692 as an implicit revocation of the relevant authority in Wis. Stat. § 236.45. Id. at ¶17. Section 59.692 repeatedly states it applies only to zoning, while section 236.45(2)(b) provides that subdivision authority “should be liberally construed in favor of the municipality.” Anderson, slip op. at ¶19. Therefore, even though it acknowledged “undeniable tension” between these two statutes, the court declined to rewrite either of them. Id. at ¶21.

Although this decision recognizes a town’s subdivision authority, it also expressly invites the Legislature to limit that authority in accord with recent strictures on zoning. The Legislature may well take up the court’s invitation. Towns should review their ordinances in the meantime. When the Legislature eliminated towns’ authority to enact shoreland zoning, it vested the rights of those towns that had existing shoreland zoning ordinances. Towns should consider adopting or amending shoreland subdivision ordinances now, so that a similar legislative change to Chapter 236 would not fully divest them of authority to regulate shoreland frontage.

Court of Appeals, District II, Upholds Town’s Denial of CUP for Cell Tower

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In Eco-Site LLC et. al. v. Town of Cedarburg, 2019 WI App 42, the Wisconsin Court of Appeals, District II affirmed the Town of Cedarburg’s authority to deny Eco-Site LLC’s conditional use permit application to build a cell tower.

After a full discussion of the information and issues, the Town Board denied Eco-Site’s application on four bases - three rooted in its ordinance and one in state law. First, the Board found the cell tower would likely result in the reduction of nearby property values. Second, the Board determined the placement of the cell tower was incompatible with land uses on adjacent land. Third, the Board concluded the cell tower would pose dangers to public health, safety and welfare. And, fourth, the Board noted that Eco-Site did not comply with Wis. Stat. § 66.0404(2)(b)6.’s “search ring” requirement in its application.

The plaintiff argued that the federal Telecommunications Act of 1996 and Wis. Stat. § 66.0404 constrain municipalities’ ability to regulate the siting and construction of new mobile service support structures and facilities. Specifically, plaintiff argued municipalities are prohibited from denying siting or construction permission by ordinances that prohibit placement of a cell tower in a particular location, or “based solely on aesthetic concerns.”

While acknowledging these limitations on municipal authority, the Circuit Court found that the Town’s denial of the cell tower CUP application was permissible, supported by substantial evidence, and not “just another way of saying aesthetics.” The Court of Appeals agreed, noting that of the Town’s six CUP standards regulating cell tower siting, none prohibited towers in certain locations or was based purely on aesthetics.

The Court of Appeals rejected Eco-Site’s claims that the Town misapplied its ordinance regarding the proposed cell tower’s compatibility with adjacent lands or relied on solely aesthetic concerns. Rather, the Town intentionally chose to zone land residential and agricultural “to keep this area rustic, rural and populated.” These zoning decisions and development goals were not purely aesthetic and did not prohibit towers in specific locations.

The Court also found the Town’s and citizen’s concerns regarding reduced property values were legitimate and not purely aesthetic. Eco-Site argued that the mere presence of “aesthetic language” in the Town’s denial letter suggested that the decision was impermissibly based on aesthetics. But the Court noted that the denial letter also discussed how the proposed project would affect broader uses of the neighborhood and nearby property values. The Court found this to be a decisive factor, explaining that the legislature’s choice of words matters. That is, an application can be denied for reasons relating to aesthetics, just not “based solely on aesthetic concerns.” 2019 WI App 42 at ¶23. Therefore, the Court found the Town’s CUP standards and its denial of Eco-Site’s permit valid because “it simply does not matter that aesthetic comments were made.”

The Court further held that, despite the parties’ differing interpretations of the statute, the Town provided the requisite substantial evidence for its denial. 2018AP580 at ¶24; see Wis. Stat. § 66.0404(2)(d)4. This deferential standard allows the Court to uphold a municipality’s decision if it finds sufficient evidence to suggest that “reasonable persons could decide as the Town did.” Oneida Seven Generations Corp. v. City of Green Bay, 2015 WI 50 ¶ 43.

In a concurring opinion, Judge Reilly stated that the Court could have affirmed the lower court’s holding for another reason: Eco-Site’s failure to demonstrate that existing locations or collocation could not meet the public’s communication needs. See Wis. Stat. § 66.0404(2)(b)6.

This decision represents an important acknowledgment of municipalities’ regulatory authority over cell tower siting. However, the Court’s decision suggests that, when denying cell tower permit applications, a municipality should ensure that it first gathers and examines substantial evidence, and finds multiple non-aesthetic reasons for denial.

Court of Appeals Weighs in on Class Action Cert Issues Under Federal Standard Recently Adopted in WI

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Last month, District I of the Wisconsin Court of Appeals was provided an opportunity to review a circuit court’s grant of a motion for class certification under the newly-revised version of Wis. Stat. § 803.08, which adopted the language and scope of FRCP 23, the federal class certification analogue.  See Harwood v. Wheaton Franciscan Services, Inc., et al., Case No. 2018AP1836 (Aug. 20, 2019).

At issue were allegations that Wheaton Franciscan Services, Inc. and a number of affiliated entities (collectively, “Wheaton”) had violated Wis. Stat. § 146.83, which places strict limitations on what health care providers may charge for the production of certain medical records, including a prohibition on charging any certification or retrieval fees to any patients or persons authorized by the patient to access the records.  Ms. Harwood alleged that she was one of many patients that had been charged with such fees in violation of this statute and accordingly filed a complaint on behalf of all such persons that had been charged by Wheaton in the past six years.

The circuit court granted Ms. Harwood’s class certification motion, concluding that the forty-plus Wheaton invoices submitted in support of her motion demonstrated that the proposed class met the requirements of Wis. Stat. § 803.08—Wheaton had charged numerous patients the fees in dispute, the patients had all been charged the same fees and would be entitled to the same statutory remedies if such fees amounted to a violation Ms. Harwood’s claim was typical and substantially similar to the claims of the unnamed class members, and the class shared predominantly the same issues given the straightforward nature of the damages calculations under the statute.  Id. ¶¶ 31-39.

The Court of Appeals affirmed the circuit court’s decision in full, providing future litigants with a number of key takeaways in its written decision, including the following:

  • The Court of Appeals affirmed that Wisconsin appellate courts will continue to review all circuit court 803.08 class certification decisions under an abuse of discretion standard, which is consistent with the deference afforded to federal district courts.  Id. ¶ 41. 

 

  • When adopting the revisions to Wis. Stat. § 803.08, the Supreme Court left it up to the lower courts to determine whether application of the reformed statute to previously-filed matters (such as this one) “would not be feasible or would work injustice.”  Id. ¶ 4, n.4.  The Court of Appeals did not disturb the circuit court’s conclusion that application of the reformed statute here would actually benefit both parties in that Wheaton “get[s] the benefit of a more rigorous analysis, which in turn corresponds to less appellate risk for [Ms. Harwood].”  Id. ¶ 34.  Litigants should expect a similar adoption of the reformed standard in their pre-existing matters unless they can substantiate that it would result in one or more parties suffering significant and concrete prejudice.

 

  • The Court of Appeals expressly agreed with the circuit court’s finding that public policy favors certifying a class when, as here, “the amount in controversy is so small that the wronged party is unlikely ever to obtain judicial review of the alleged violation without a class action.”   Id. ¶ 58.  Both courts appeared to find this reasoning especially persuasive and a core principle behind allowing individual aggrieved parties to litigate their claims collectively.

 

  • The Court of Appeals rejected Wheaton’s reliance on federal Third Circuit precedent imposing a “heightened ascertainability” requirement upon proposed class members (which requires “a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition,” see Byrd v. Aaron’s Inc., 784 F.3d 154, 163 (3d Cir. 2015)), noting that the federal Seventh Circuit disagrees that FRCP 23 imposes such a rigorous requirement upon potential class members.  Slip. Op. ¶ 64 (citing Mullins v. Direct Digital, LLC, 795 F.3d 654, 672 (7th Cir. 2015).  This suggests that Wisconsin courts will interpret federal Seventh Circuit precedent as more persuasive than other circuits when addressing class certification issues under the newly-reformed version of Wis. Stat. § 803.08, and may even view such precedent as binding (as the next bullet point suggests).

 

  • The Court of Appeals cited favorably to Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th Cir. 2001), for the proposition that it would be improper for a circuit court to certify a class based solely on the allegations raised in the complaint, as that would “‘move[] the court’s discretion to the plaintiff’s attorneys—who may use it in ways injurious to other class members, as well as ways injurious to defendants.’”  Slip. Op. ¶ 62 (quoting Szabo, 249 F.3d at 677)).  The Court of Appeals ultimately held that such circumstances were not present here, where the plaintiff had substantiated its claims by submitting the Wheaton invoices as evidence.  Id.  The Court further rejected Wheaton’s argument that it needed more discovery to properly respond to the plaintiff’s certification motion, noting that the parties had already had an opportunity to conduct discovery and that the crucial evidence to the analysis (i.e., the Wheaton invoices) were Wheaton’s own business records.  Id. ¶ 64.  Future litigants accordingly should take note that Wisconsin courts may be receptive to arguments seeking to delay class certification decisions under circumstances where discovery of potential evidence relevant to the analysis may be warranted.

Public Records Requests: Form Matters

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Wisconsin’s Public Records Law requires officials to provide “the greatest possible information” in response to public records requests. Wis. Stat. § 19.31. In Lueders v. Krug, the Wisconsin Court of Appeals, District II, clarified that this mandate requires officials to provide electronic copies of materials if electronic copies are requested.

In June 2016, Bill Lueders emailed State Representative Scott Krug to request copies of all citizen correspondence relating to specified bills and key terms. Krug made paper copies of the responsive emails, which Lueders personally inspected. In July, Lueders again emailed Krug to revise his request, clarifying that he wished “to receive the records in electronic form.” Krug refused, arguing that the paper copies were sufficient, and citing Wis. Stat. § 19.35(1)(b):

If a requester appears personally to request a copy of a record that permits copying, the authority having custody of the record may, at its option, permit the requester to copy the record or provide the requester with a copy substantially as readable as the original.

Lueders filed a mandamus action to require Krug to release the documents in electronic form. The circuit court granted mandamus relief to Lueders. The court of appeals affirmed.

The court of appeals first concluded that Krug misinterpreted the applicable statute. Section 19.35(1)(b) only applies when a requester appears in person and makes a request. Here, Lueders made both of his requests by email. Further, the Legislature amended this section in the 1990s; previously, the section applied to all public records requests. This change demonstrated to the court of appeals that the Legislature intentionally distinguished between in-person and other public records requests.

The court of appeals next explained why paper copies were not an adequate substitute for electronic copies. As in State ex rel. Milwaukee Police Ass’n v. Jones—where an amended request for a digital copy of an audio recording was not satisfied by having previously provided an analog copy—electronic copies contain substantially more and different information compared to paper copies. For example, metadata (i.e., data about other data) can “show when documents were created and who created them[; …] a paper printout from electronic records, unlike an electronic copy, results in a loss of some information.” Lueders at ¶ 12.

Ultimately, Krug was left arguing that the paper copies were “good enough” in response to a request for electronic copies. The court disagreed, and ordered release of electronic copies.

Moving forward, public records custodians should carefully review all records requests, and provide answers in the desired format (when this would not require them to create additional documents, i.e., create a record). Officials should also understand what metadata is, and what it can reveal to public records requesters.

State Can Raise New Argument in Civil Forfeiture Action, Even After Dismissing Criminal Charges

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Some civil and criminal cases rely on indistinguishable facts. However, a recent Wisconsin Court of Appeals decision – Wisconsin v. Scott, et. al., 2017AP1345 – demonstrated that the parties need not make indistinguishable arguments in each case.

In 2016, police seized drugs, money and vehicles pursuant to a search warrant for the Scotts’ property. However, it was determined that there was not sufficient probable cause to support the search warrant. The evidence from the search was therefore suppressed, and the State voluntarily dismissed the criminal charges against the Scotts.

Despite dismissal of the criminal charges, the State proceeded with the civil forfeiture action, seeking retention of the seized cash and vehicles. See Wis. Stat. § 961.55. The Scotts moved for summary judgment, arguing that, under One 1958 Plymouth Sedan v. Pennsylvania, 380 U.S. 693 (1965), the exclusionary rule extends to this civil forfeiture action because it is of a “quasi-criminal nature”. The State argued that Plymouth Sedan should not apply to this action.

The State also sought an evidentiary hearing on an argument not made in the criminal case: whether the good-faith exception to the exclusionary rule would permit introduction of the cash and vehicles. The State relied on State v. Eason, where the supreme court found that the exclusionary rule might not apply when police objectively and reasonably rely on a search warrant, because then the rule would not fulfill its purpose (deterring unreasonable police actions). 2001 WI 98, ¶ 27, 245 Wis. 2d 206, 629 N.W.2d 625. The Scotts did not rebut the merits of the good-faith exception, but instead argued the State should be foreclosed from making this argument in the civil proceeding because it had not been raised in the criminal case.

The Circuit Court granted summary judgment to the Scotts. It agreed that, with the search evidence suppressed under Plymouth Sedan, the State could not prove criminal conduct, and the civil forfeiture action could not proceed.

The Wisconsin Court of Appeals, District IV reversed. It agreed that Plymouth Sedan applied, so the exclusionary rule would typically end this sort of civil forfeiture action based on a lack of proof of criminal conduct. However, the court held that the State should have been allowed to contest the applicability of Plymouth Sedan with the good-faith exception argument. The Court of Appeals asserted that the State deserved this opportunity even if it had not argued for the exception at the accompanying criminal proceedings.

The Court of Appeals reached this decision for two reasons. First, the Scotts did not argue against the good-faith exception on appeal; instead, they simply repeated that the State had not raised this argument in the criminal cases. The Court of Appeals considered this a concession by the Scotts that the State should have the opportunity to make this argument. Further, the Circuit Court had not addressed either the applicability or merit of this argument, so the Court of Appeals lacked the evidence to determine either. As a result, the Court of Appeals remanded for further proceedings on the good-faith exception.

The State still may not end up with the cash and vehicles. But this case is an important reminder that – absent issue or claim preclusion – parties can be strategic about which claims to pursue, and arguments to make, in civil versus criminal cases.

Stafford Helps Municipalities Preserve “Discretionary” Immunity in Wisconsin Supreme Court

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Last month, in a decision with far-ranging consequences, the Wisconsin Supreme Court rejected a call to abrogate the existing “discretionary” immunity standard applied to tort claims made against municipal actors.  Representing the League of Wisconsin Municipalities, the Wisconsin Towns Association, and the Wisconsin Counties Association as amici curiae (friends of the court), we filed a brief and participated in oral argument.

In Engelhardt v. City of New Berlin, 2019 WI 2, 385 Wis. 2d 86, 921 N.W.2d 714, the Court held that the City of New Berlin was not protected by governmental immunity because the known-and-present-danger exception applied.  However, as urged by Stafford, the Court preserved the discretionary immunity standard for tort claims against municipal actors.  As explained below, because only a narrow, 4-3 majority of the Wisconsin Supreme Court favored preserving the “discretionary” immunity standard, further challenges to that long-established standard are foreseeable.

Background on Governmental Immunity

Stafford Rosenbaum frequently defends municipal parties against tort claims. Immunity is often a key issue in such cases. Wis. Stat. § 893.80 provides immunity to a municipal actor “for acts done in the exercise of its legislative, quasi-legislative, judicial or quasi-judicial functions.”  Recognizing the separation of powers pitfalls implicated by permitting individual parties to use the courts to intrude and review the policy decisions of elected bodies (e.g., Town and Village boards, City councils, etc.), the Court has long interpreted Wis. Stat. § 893.80 to provide immunity for the “discretionary” decisions of municipal actors. 

However, there are two main exceptions to immunity – one for ministerial duties and another for known and present dangers.  Duties are ministerial for the purposes of governmental immunity when a duty is “absolute, certain and imperative, involving merely the performance of a specific task” imposed by law.  This exception to immunity applies when statutes, ordinances, or policies obligate the municipality to take a specific action.  Where there is no discretion, there is no immunity.  For example, the Court held that where regulations require railings on a stadium’s camera stand, there is no discretion to place the railings, and therefore no immunity from claims to recover damages caused by the failure to install such railings.

The second exception, the known-and-present-danger exception, applies only “where the danger is so severe and so immediate” that a response is demanded.  Once again, because there is no discretion, there is no immunity.  However, application of this judicially created exception is narrow and very fact-specific.  For example, the seminal case involves a fall, arguably caused by a park ranger’s failure to give warning that a path passed within inches of a partially concealed 90-foot drop. 

Case Background for the Engelhardt decision

The Engelhardt case arose when Lily Engelhardt, age eight, drowned during a summer camp field trip to a swimming pool.  Lily’s mother had informed the camp supervisor that Lily could not swim; however, no other camp staff were informed of this fact.  Lily’s mother granted permission for Lily to attend the field trip after assurances that Lily would be given a swim test upon arrival at the pool.  If Lily did not pass the swim test, the camp supervisor promised to keep her in the shallow, splash pad area. 

However, when the nearly 80 campers arrived at the pool, Lily was not tested before she entered the water.  Although campers like Lily were instructed to see a camp staff member for a swim test, no one was directly supervising Lily. As camp staff completed ushering campers through the locker rooms, Lily was discovered drowned in the pool by lifeguards who were unable to revive her.

Lily’s parents brought suit against the City (which ran the summer camp program) for wrongful death.  The City moved for summary judgment, arguing that the suit was barred by governmental immunity.  After the circuit court denied the City’s motion, the Court of Appeals reversed. The appellate court held that the City had not breached any alleged “ministerial duty” and that the facts of the case did not constitute a known and present danger. 

Majority Opinion

The Wisconsin Supreme Court reversed. It denied the City’s invocation of immunity because the “obvious dangers” under the circumstances met the standard for the “narrow” known-and-present danger exception. 

The portion of the decision with broader impact is the majority’s rejection of the plaintiffs’ request that the Court eliminate the “discretionary” immunity standard.  The majority, written by Justice Shirley Abrahamson, highlighted the seminal 1976 decision in Lister v. Board of Regents. There, the Court applied the discretionary standard based on the “public policy considerations” of protecting the public purse and a preference for “political rather than judicial redress for the actions of public officers.” 

The Engelhardt majority also highlighted the fact that the Legislature has acquiesced for decades in the discretionary-immunity standard; this acquiescence includes, but is not limited to, the 1977 repeal and recreation of the immunity statute.  Because this revision was after the Lister decision applying the discretionary standard, the Engelhardt majority found that the Legislature’s inaction expressed implicit approval of that standard.  In other words, the majority reasoned that if the Legislature thought the Court was wrong to interpret the statute as applying to “discretionary” decisions in 1976, then the Legislature would have addressed that issue when it repealed and recreated the immunity statute in 1977. 

Finally, the majority noted that just two years ago, in Melchert v. Pro Elec. Contractors, the Court rejected the interpretation proposed by the Engelhardts (which was reflected in the dissent written by Justice Rebecca Bradley and joined by Justice Daniel Kelly). 

Concurrence

The three Justices (Rebecca Dallet, Rebecca Bradley, and Daniel Kelly) who did not join the majority filed a separate opinion. That opinion, while technically a concurrence, agreed with nothing in the majority except the end-result that the City was not entitled to immunity.  In her first opinion on the Court, Justice Dallet argued that the majority “expanded” the “narrow” exception for known and present dangers to accommodate the facts of this case. She explained that the exception typically applied only where the potential danger was high and imminent and the act required to prevent the danger was clear. By comparison, Justice Dallet reasoned that, if camp staff had seen Lily walking along the edge of the deep end of the pool, then the exception may have applied.  Because Lily’s presence at the pool facility did not on its own create a compelling danger, she concluded that the exception should not apply.

Instead of invoking the known-and-present-danger exception, the concurrence would have rejected immunity outright. To reach that outcome, the concurring Justices recommended eliminating the existing “discretionary” immunity standard.  In proposing abrogation of this standard, Justice Dallet referred to the “plain language” of statute and harkened back to the Court’s 1962 seminal decision in Holytz v. City of Milwaukee, which abrogated common-law immunity.  One year later in 1963, the Legislature enacted the predecessor to today’s Wis. Stat. § 893.80 which re-instated immunity based upon language in the Holytz decision.  In light of the relationship between Holytz and the re-instated statutory immunity, the concurrence emphasized Holytz’s assertion that, “so far as governmental responsibility for torts is concerned, the rule is liability – the exception is immunity.”

Justice Dallet went on to catalogue what she called the judicial chaos created by the discretionary standard, which, she asserted, seemed “almost random at times.”  The three-justice concurrence declared there was “no time like the present” to eliminate the existing “discretionary” immunity standard.  In its place, Justice Dallet proposed an interpretation that provides immunity “only for agents or employees of a governmental entity who are engaged in an act that, in some sense or degree, resembles making laws or exercising judgments related to government business.” 

Applying this proposed standard, the concurrence reasons that the “promulgation” of the City’s camp guidelines would receive immunity for the content of the guidelines, but the City would not be immune “from suit for its camp staff negligently failing to supervise Lily in accordance with the guidelines.”  Justice Dallet’s opinion highlighted that the camp guidelines provided clear instructions to “know where the kids in your care are at all times” and “under no circumstances should kids be left alone.”  Because the City allegedly failed to meet these guidelines, she concluded that no immunity should apply.

Analysis

The weakness of the majority’s opinion is that (as charged by the concurrence) it arguably expands the “narrow” known-and-present-danger exception.  In other words, Lily’s mere presence at the pool cannot create a known and compelling danger, at least as that exception had been applied previously.  Nonetheless, the facts of Lily’s drowning are tragic.  Perhaps, as footnoted by the concurrence, a modest expansion of the “known danger” exception would serve former Justice Crooks’ wish to strike a better “balance between too much immunity . . . and too much liability.”  Such a re-balancing could help to address the constant refrain to Holytz declaring that “liability is the rule, immunity the exception” and the repeated calls to eliminate the existing “discretionary” immunity standard.    

By comparison, the concurrence fails to mention any of the legislature’s acquiescence to the “discretionary” standard or its acting in reliance upon it – an argument emphasized by the majority.  After all, the governmental immunity applicable today is statutory, while the immunity abrogated by Holytz was judicially created.  Even in Holytz, which abrogated immunity and is relied upon by the concurrence, the court painstakingly distinguished its ability to abrogate immunity in 1962 because the doctrine was judicially created – which is entirely different from the present-day review of statutory immunity enacted by the Legislature.  The concurrence offers no explanation on how to rectify this distinction in order to alter now the longstanding application of statutory immunity.  Instead, the concurrence would simply overrule the Court’s precedent on the “discretionary” immunity standard.

It is also hard to see how the proposed alternative standard offers any more clarity than the standard the concurrence wants to abandon.  The proposed standard applies only where the municipal actor is “engaged in an act that, in some sense or degree, resembles making laws or exercising judgment related to government business.”  How this standard differs from the existing discretionary standard is entirely unclear.  To be fair, the proposed standard would apply to the promulgation of policies, but, if it did not extend to “acts done in the exercise of” such policies, it would directly contradict the statutory language (which the concurrence claims to be reliant upon).  Even more to the point, it would create a legal fiction to grant immunity to the decision to enact a policy yet deny immunity from the results of those policies being acted upon. 

Applying this newly proposed standard, Justice Dallet concludes that, because the camp staff negligently failed to supervise Lily according to camp guidelines, there would be no immunity.  There is a view of the facts that support such a conclusion in this case.  However, how this conclusion differs from the existing ministerial-duty standard is once again unclear.  If the three-justice concurrence concluded that the camp staff failed to comply with guidelines imposed upon them, then this constitutes a breach of a ‘ministerial duty’ and there is no “discretion” under the existing immunity standard.  In other words, the concurrence need not create a whole new standard just to reach the same result.  The concurrence could have simply applied the “ministerial-duty” exception under the existing discretionary immunity standard.  The concurrence does not explain why it did not.

Conclusion

For municipal clients, setting aside the fact-specific application of the known-and-present-danger exception in Engelhardt, the main takeaway from the decision is that Justice Dallet joined Justices Rebecca Bradley and Daniel Kelly in seeking to eliminate the existing discretionary-immunity standard.  Justice Abrahamson wrote the majority opinion preserving the standard; however, with an April judicial election to replace her on the bench (and Justice Kelly’s seat being up for election in April 2020), her following words appear likely prescient:

It is unwise for a court to frequently call into question existing and long-standing law.  Doing so gives the impression that the decision to overturn prior cases is ‘undertaken merely because the composition of the court has changed.’

            In light of the sharp disagreements on the court regarding the interpretation and application of Wis. Stat. § 893.80, the existing discretionary immunity standard for municipal actors is likely to remain a flashpoint for the Wisconsin Supreme Court in the coming years.

Stafford Rosenbaum attorneys (left to right) Ted Waskowski and Kyle Engelke in front of the Wisconsin Supreme Court Hearing Room in the East Wing of the State Capitol building in Madison, WI.

Wisconsin Supreme Court Confirms Limited Liability Exposure For Banks Upon Embezzlement By Employees

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UPDATE: On January 29, 2019, the Wisconsin Supreme Court affirmed in a 5-2 decision the dismissal of a Wisconsin Uniform Fiduciaries Act (“UFA”) claim against the Park Bank located in Milwaukee, Wisconsin.  See Koss Corp. v. Park Bank, Case No. 2016AP636, 2019 WI 7.  The Justices did not agree, however, on the applicable standard for proving bad faith under the UFA statute as enacted in Wisconsin.  Chief Justice Roggensack and Justice Ziegler citing in general to N.J. Title Ins. Co. v. Caputo, 748 A.2d 507, 514 (N.J. 2000), concluded that bad faith requires proof of “some evidence of bank dishonesty such as a bank willfully failing to further investigate compelling and obvious known facts that suggest fiduciary misconduct because of a deliberate desire to evade knowledge of fiduciary misconduct.”  Id. ¶ 55.

Justices Ann Walsh Bradley, Abrahamson, and Dallet held they would expressly adopt the Caputo standard that: “bad faith denotes a reckless disregard or purposeful obliviousness of the known facts suggesting impropriety by the fiduciary.  It is not established by negligent or careless conduct or by vague suspicion.  Likewise, actual knowledge of and complicity in the fiduciary’s misdeeds is not required.  However, where facts suggesting fiduciary misconduct are compelling and obvious, it is bad faith to remain passive and not inquire further because such inaction amounts to a deliberate desire to evade knowledge.”  Id. ¶ 86.

The Court ultimately found the facts at issue in this dispute did not meet either bad faith standard.  So, while the precise bad faith standard applicable to a UFA claim in Wisconsin remains unsettled, the clear takeaway from this holding is businesses must continue to vigilantly monitor their financial activities internally, as they will not be able to recover from financial institutions for losses stemming from fraudulent transactions except where there has been egregious conduct by the financial institution.

On December 12, 2017, the Wisconsin Court of Appeals addressed a civil dispute arising from the high-profile criminal embezzlement scheme committed by Koss Corporation Vice President of Finance, Sujata (“Sue”) Sachdeva.  At issue were allegations Koss made against its bank seeking recovery on the theory that the bank committed bad faith in not detecting the embezzlement scheme. See Koss Corp. v. Park Bank, No. 2016AP636 (Wis. Ct. App. Dec. 12, 2017).

Koss’s complaint alleged that Park Bank of Milwaukee, Wisconsin, violated Wisconsin’s Uniform Fiduciaries Act (“UFA”) by allowing Ms. Sachdeva to embezzle about $34 million from Koss accounts for personal use. Ms. Sachdeva used a variety of ways to embezzle the $34 million, including requesting cashier’s checks and cashing checks made out to “petty cash,” as well executing wire transfers to pay personal credit card bills.  Koss alleged the bank’s failure to discern Ms. Sachdeva’s embezzlement scheme amounted to a violation of Wis. Stat. § 112.01(9), which exposes a bank to liability if it permits transactions “with knowledge of such facts that [the Bank’s] action in paying the check amounts to bad faith.”

The bank moved for summary judgment, asserting that no material facts established it had intentionally or deliberately allowed the transactions to occur in bad faith.  At the circuit court, the court held that Koss had failed to cite any evidence that the bank “intentionally ignored Sachdeva’s embezzlement,” without which there was no way to show the bank acted in bad faith.  The court further noted that the circumstances established only the bank may have been negligent in failing to uncover the fraudulent conduct, but that one of the purposes in adopting the UFA was to eliminate negligence claims against banks arising from transactions where employees or other persons acting as an agent of a depositor commit an act causing a loss to the depositor. 

On appeal, Koss took the position that, although the bank lacked actual knowledge of Ms. Sachdeva’s embezzlement scheme, the circumstances raised enough red flags that a factfinder could conclude that the bank’s failure to detect the fraudulent transactions amounted to bad faith under the UFA.  In support of its position, Koss cited to (1) the large volume of improper checks—adding up to millions of dollars—Sachdeva requested, (2) the bank allowing unauthorized Koss representatives to request, endorse, and pick up checks, (3) the bank’s acceptance of checks payable to companies with cryptic initials (e.g., “N.M., Inc.” for Neiman Marcus and “S.F.A., Inc.” for Saks Fifth Avenue), (4) after-the-fact deposition testimony from a bank employee that the large number of cashier’s checks requested were “strange,” (5) Ms. Sachdeva’s testimony that she chose the bank at issue because of the ease in which she could conduct her fraudulent transactions, and (6) the bank’s failure to implement and/or enforce proper fraud-detection policies and procedures.

Despite this evidence, the Court of Appeals affirmed the circuit court by dismissing Koss’ claim of bad-faith.  Consistent with cases from other jurisdictions interpreting the UFA, our Court of Appeals concluded that to effectively bring a claim of bad faith under the UFA a depositor needs “proof of two elements: (1) circumstances that are suspicious enough to place a bank on notice of improper conduct by the [employee embezzling the depositor’s money on deposit]; and (2) a deliberate failure [by the bank] to investigate the suspicious circumstances because of a belief or fear that such inquiry would disclose a defect in the transaction at issue.”  Id., ¶ 27.

While the Appeals Court acknowledged that Koss cited ample evidence to establish the bank’s negligent failure to investigate and discover Ms. Sachdeva’s embezzlement scheme, it concluded that Koss failed to adduce facts sufficient to allow a factfinder to determine that the elements of proof for bad faith under the UFA were satisfied:

 

Although the transactions Sachdeva engaged in may appear suspicious or odd in hindsight, Koss has not cited any evidence to indicate that, in the larger context of Koss’s banking practices and the banking practices of Park Bank’s other corporate clients, the transactions were suspicious enough to put Park Bank on notice of Sachdeva’s misconduct.  Koss also fails to cite any evidence indicating that Park Bank deliberately declined to investigate Sachdeva’s transactions due to a fear that further inquiry would disclose defects in them.

 

Id., ¶ 51.  The Appeals Court then concluded that allowing Koss’ claim to proceed would be contrary to the UFA’s purpose of insulating banks from the misconduct of a depositor’s employees.  Id., ¶ 52.

This decision highlights how important it is for businesses to adopt and enforce internal monitoring protocols for financial activities by their employees and agents.  By adopting the UFA, Wisconsin has allocated the risk of loss stemming from fraudulent financial transactions to businesses rather than banks in all but the most egregious circumstances.  Businesses failing to take notice of suspicious financial activities (1) not only expose themselves to the risk of severe financial losses, but also (2) if the business has publicly traded securities then they may expose themselves to possible violations of federal securities law for failing to properly ensure the accuracy of their financial reporting.  See id., ¶ 12 n.4 (noting an adverse judgment entered against Koss pursuant to SEC lawsuit).

Please feel free to contact Greg Jacobs or Rich Latta if you would like to discuss any of the matters discussed above.

While a law firm with which Mr. Latta was previously affiliated may have provided legal representation of a party mentioned in Koss Corporation v. Park Bank, Mr. Latta did not represent any party involved and the thoughts expressed herein are strictly his own.

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

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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 Court of Appeals Affirms Limited Scope of Insurance Agents’ Duties to Insureds

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District III of the Wisconsin Court of Appeals recently addressed the scope of an insurance agent’s duties to an insured when retained to procure insurance coverage.  See Olson et al. v. Wisconsin Mutual Ins. Co. et al., Case No. 2017AP1567 (Oct. 2, 2018) [https://wscca.wicourts.gov/caseDetails.do?caseNo=2017AP001567&cacheId=FD38D2808B90DA8A4890651728193F6B&recordCount=1&offset=0].  By affirming the circuit court’s decision to dismiss the insured’s negligence claim against its agent, the Court confirmed that, absent unique circumstances, in Wisconsin an insurance agent is not obligated to actively advise an insured regarding the appropriate coverages for the insured’s circumstances.  Rather, an agent is obligated to exercise reasonable care in procuring only the coverages specifically requested by the insured.

At issue in this case was coverage for injuries suffered by the Olsons due to an automobile collision with Jeffrey Keyes, who was in the process of towing a gooseneck trailer full of cattle between his family farm properties.  Keyes was towing the trailer with a truck that he owned personally.

Keyes had in place a personal automobile insurance policy issued by Wisconsin Mutual Insurance Company, as well as a $1 million umbrella liability endorsement attached to a farmowners policy for his family farm issued by Rural Mutual Insurance Company. Keyes submitted a claim to both insurers for the accident with the belief that the umbrella endorsement attached to the Rural policy would cover any damages that exceeded the limit of the Wisconsin Mutual policy.

Rural denied the claim based on an exclusion in the endorsement disclaiming coverage for personal injury or property damage arising from off-farm use of personal automobiles.  This exclusion was in line with Rural’s standard business practice of not providing umbrella coverage for personal automobiles unless the insured purchased primary automobile coverage from Rural.  While Keyes asserted a contextual ambiguity argument to try to avoid the exclusion, the court found the provision unambiguous and concluded that the Rural policy did not provide coverage for the Olson claim.

In the alternative, Keyes pursued a claim against his agent, Lon Truax, for failure to procure coverage arising from the use of off-farm personal automobiles as part of the umbrella endorsement attached to the Rural policy.  In support of his claim, Keyes cited to evidence demonstrating that he had informed Truax that he wanted “full coverage” for “anything and everything,” that Truax sold only Rural insurance products and was aware of Rural’s practice to not offer umbrella automobile insurance unless the insured purchased primary automobile insurance from Rural, and that Keyes and Truax had specific conversations about switching Keyes’ automobile coverage from Western Mutual to Rural.  Keyes asserted that, under these circumstances, it was reasonable to expect Truax to inform him of the off-farm automobile exclusion in the umbrella endorsement, which he had failed to do.

The court was not persuaded by this argument.  The court noted that in Wisconsin an insurance agent-insured relationship is an ordinary agency relationship in which the agent assumes only a limited duty to carry out the principal’s instructions in good faith and, absent special circumstances, is not obligated to advise the insured regarding the availability or adequacy of coverage.  The court found that Keyes’ generalized requests for full coverage were insufficient to put Truax on notice that he specifically sought umbrella coverage for off-farm use of personal automobiles and, despite the specific conversations about switching his primary automobile coverage to Rural, there was nothing in the record sufficient to establish that Truax was obligated to advise Keyes regarding any potential gaps in the procured coverage.  The court accordingly held that the circuit court had properly granted summary judgment for Truax on this issue.

The Olson decision demonstrates how important it is for commercial enterprises and businesses to take an active role in procuring adequate insurance to protect their interests.  In Wisconsin, insurance agents are not fiduciaries that should be relied on to weigh in regarding the adequacy of an insurance portfolio unless they specifically offer such services and agree to do so (likely for an additional fee).  In any event, before procuring insurance products, commercial entities should ensure that their coverage forms are reviewed carefully by those who are familiar with all aspects of their operations and resulting risk profile (either an internal risk management department and/or coverage counsel) to minimize the potential for any coverage gaps.

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