Sunday, June 27, 2010

Decision in 'Ehlinger v. Hauser' 2010 WI 54

Deficient financial records preclude contract enforcement, supreme court holds, by Joe Forward, State Bar of Wisconsin


Wisconsin Supreme Court decision Friday in this case (2007AP477) modifying and affirming the Court of Appeals decision, 2008 WI App 123, 313 Wis. 2d 718, 758 N.W.2d 476. See Argument.

Opinion by Justice Bradley, joined by Chief Justice Abrahamson.
¶116 In sum, we conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald's books to determine whether they accurately reflect the corporation's assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald's records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.

¶117 Further, to the extent that Hauser's characterization of the court of appeals' decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAP, but what is required to determine the parties' rights.

¶118 We also conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.

¶119 Finally, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser's litigation expenses. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. §180.0855. Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense.
Concurrence by Justice Roggensack.
¶123 I also write in concurrence because I conclude that the majority's theory that the proposed buy-sell agreement is unenforceable due to Hauser's failure to preserve sufficient corporate records to verify Evald's March 31, 2001 balance sheet rests on three unspoken assumptions, with which I am not in agreement. The first assumption is that the proposed buy-sell agreement between Ehlinger and Hauser intended Evald's March 31, 2001 balance sheet to be the basis for determining book value no matter on what basis that balance sheet's assets and liabilities were valued. The second assumption is that Hauser had an obligation to maintain documents sufficient to verify Evald's March 31, 2001 balance sheet. The third assumption is that having the documents that underlie Evald's March 31, 2001 balance sheet will cure any ambiguity or indefiniteness in the proposed buy-sell agreement. None of those assumptions is warranted.
Concurrence and dissent by Justice Prosser, joined in dissent by Justice Gableman.
¶190 ... the majority concludes that Hauser may have been eligible for attorney fees under Wis. Stat. §180.0851(2) but he failed to seek them in a proper manner under Wis. Stat. §180.0855(5) ("By a court under s. 180.0854."). Majority op., ¶¶97, 103, 119.

¶191 There are two problems with this legal conclusion. First, there is no time limit for an application for indemnification. ...

¶192 Second, as the majority notes, "[o]n four occasions, [Dr.] Ehlinger asked the circuit court to enjoin Hauser from paying for the litigation with corporate funds." ... The majority seizes on another technicality——that Hauser did not initiate an application to the circuit court for approval of attorney fees——to avoid determining the issue on the merits. ...
Concurrence and dissent by Justice Ziegler, joined in dissent by Justice Gableman.
¶209 Accordingly, if the special magistrate was indeed appointed as a referee, the parties were precluded from making a full record regarding the referee's actions. If, on the other hand, the special magistrate was appointed as an expert witness, the parties were not given their statutorily-imposed opportunity to depose and fully cross-examine him. Without the benefit of either of those requirements, the majority concludes that the case should be remanded for the appointment of a receiver. Because the parties were deprived of the opportunity to fully develop evidence and make a complete record, I would instead remand the case to the circuit court for full development of the record.

¶210 In addition, I dissent from the majority opinion's conclusion that it "need not resolve whether the buyout agreement is indefinite, ambiguous, neither, or both because resolution of that question would not change the outcome of this case." Majority op., ¶59. To the contrary, if words or phrases in an agreement are ambiguous, as in reasonably susceptible of more than one meaning, then it is the court's duty to determine the parties' intent at the time the agreement was entered into. [citation omitted]
Justice Crooks did not participate.