Allsop Venture Partners III v. Murphy Desmond S.C., 2020AP806
| Decision Date | 21 October 2021 |
| Docket Number | 2020AP806 |
| Parties | Allsop Venture Partners III, Alta V. Limited Partnership, Alta Subordinated Debt Partners III LP and State of Wisconsin Investment Board, Plaintiffs, Terry K. Shockley, Sandy K. Shockley and Shockley Holdings Limited Partnership, Inc., Intervenors-Plaintiffs-Appellants, Terence F. Kelly, Intervenor, v. Murphy Desmond SC, Robert A. Pasch and Westport Insurance Company, Defendants-Respondents. |
| Court | Wisconsin Court of Appeals |
This opinion will not be published. See Wis. Stat. Rule 809.23(1)(b)5.
APPEAL from a judgment of the circuit court for Dane County: No 2009CV4165 RICHARD G. NIESS, Judge. Affirmed.
Before Blanchard, P.J., Fitzpatrick, and Graham, JJ.
Per curiam opinions may not be cited in any court of this state as precedent or authority, except for the limited purposes specified in Wis.Stat. Rule 809.23(3).
¶1 Acting in consultation with tax advisors and attorneys, the large shareholders of a closely held corporation executed what amounted to a sale of the corporation. In an attempt to avoid taxes on that transaction, they used a so-called "midco transaction," in which an intermediary or "middle company" facilitated the sale of the corporation's stock and the (purportedly separate) transfer of a substantial portion of its assets to a third-party purchaser. But the Internal Revenue Service took the position, later upheld by the federal courts, that this was in substance not a stock sale separate from an asset sale but, instead, a single transaction: the direct sale of the corporate assets involving a sale of stock. See Shockley v. Commissioner, 872 F.3d 1235, 1245-46, 1250-51, 1256 (11th Cir. 2017) (). As a result, large shareholders in the corporation, including corporation founders Terry Shockley and Sandy Shockley, were assessed significant tax liabilities as transferees under federal and state law.[1] See id. at 1256.
¶2 In the wake of the imposition of these significant tax liabilities, investors in the corporation brought this action in Dane County Circuit Court. At issue in this action is the allocation of responsibility for causing the tax liabilities among the Shockleys, accountants, lawyers, and others. The Shockleys joined the action as intervening plaintiffs. Various parties settled out of the case, pursuant to a Pierringer release.[2]
¶3 By the time of trial, the remaining plaintiffs were the Shockleys and the remaining defendants were the law firm Murphy Desmond, an attorney of that firm, and the firm's malpractice insurer. The jury returned verdicts resolving a range of issues regarding alleged negligence and intentional misrepresentations by various individuals and entities. This included jury findings that Terry Shockley and Murphy Desmond were negligent, but also that the defendants who had entered into pretrial settlements with the plaintiffs had committed intentional torts. The circuit court considered post-trial arguments and entered a decision and order granting Murphy Desmond's motion for judgment on the verdict. This was based in part on the court's conclusion that the causal negligence that the jury attributed to Murphy Desmond was fully satisfied through indemnity by operation of the Shockley's pretrial Pierringer-release settlements with settling defendants, because the settling defendants were intentional tortfeasors.
¶4 The arguments of the Shockleys on appeal fall into three categories. The first two categories of arguments are that the circuit court erroneously exercised its discretion: (1) in making rulings related to evidence or argument regarding the existence of the pretrial Pierringer-release settlements and (2) in denying the Shockleys' post-trial motions to change verdicts based on their claims that the verdicts were not supported by sufficient evidence. The third category of arguments is that the circuit court misapplied indemnity principles to determine that Sandy Shockley and Shockley Holdings are not entitled to any recovery in this case beyond what they received in the pretrial settlements.[3] We affirm on all issues.
¶5 The testimony and exhibits at the ten-day trial include voluminous details about the intricate structure of the midco transaction and related tax law. This included extensive testimony about how the midco transaction came into existence and how it was executed, as well as about the aftermath of IRS review and court resolution of tax issues. The following is the basic background necessary to understand our resolution of the specific arguments made by the parties on appeal, when considered with additional facts referenced in the Discussion section below.
¶6 In 1985, Terry and Sandy Shockley formed Shockley Communications Corporation ("the corporation"). The corporation came to own a number of radio and television stations. Investors were brought in to fund expansion of the corporation, which was always closely held.
¶7 In 2000, major shareholders explored a sale of the corporation. Toward that end, Terry and Sandy Shockley and other members of the board of directors discussed with members of an accounting firm now called RSM US, LLP ("RSM") potential modes of selling or reorganizing the corporation. As part of this activity, Stephen Schmidt then an RSM managing director and tax partner, introduced the Shockleys to Integrated Capital Associates ("ICA").
¶8 Summarizing broadly, there was evidence that RSM's Schmidt and others described the following to the major shareholders as one sale option involving ICA and other entities. ICA would create a new entity, the midco. After a potential purchaser of significant assets belonging to the corporation had been identified, the midco would, in quick succession, (1) buy the shareholders' corporate stock and (2) arrange for funds coming from the asset purchaser to flow back to the shareholders. Through this method, a significant portion of the assets of the corporation would be sold to the actual purchaser, an Illinois-based company. The goal was to avoid tax obligations that would have accrued from a straight asset sale.
¶9 Attorney Pasch of Murphy Desmond undertook a number of activities on behalf of the corporation's shareholders related to the midco transaction. One was to negotiate the terms of the stock sale portion of the transaction among interested persons and entities. Also, after consultation with persons who included Terry Shockley, Pasch reached out to the law firm Curtis, Mallet-Prevost, Colt & Mosle LLP ("Curtis Mallet") to provide an opinion letter related to the potential tax consequences of the midco transaction. Curtis Mallet provided a written opinion stating that key elements of the transaction should be recognized for federal income tax purposes as a stock sale and not as an asset sale, with favorable tax consequences for the shareholders.
¶10 The midco transaction closed on May 31, 2001. But the IRS ultimately rejected major premises of the transaction namely, the premises that by virtue of the corporation allegedly merging into a new entity created for purposes of the midco transaction, the corporation was liquidated and the transaction-related funds that were transferred to its shareholders were tax-free distributions. See Shockley, 872 F.3d at 1245-46. Applying federal tax law principles (which are not disputed in this appeal), the federal court determined that the midco transaction must be disregarded and that the corporation's shareholders were actually transferees of "its highly appreciated assets." See id. at 1256. This had the effect of rendering the shareholders "substantively liable under Wisconsin state fraudulent transfer law for the taxes generated by the built-in gain on the appreciated assets" that the corporation sold. Id.
¶11 Former shareholders of the corporation (identified as the plaintiffs in the caption of this appeal and to whom we refer as "the initial plaintiffs") sued Curtis Mallet one of its partners (William Bricker), RSM, Schmidt, another RSM employee (David Klintworth), Murphy Desmond, and Pasch. The initial plaintiffs alleged legal malpractice by Curtis Mallet, Bricker, Murphy Desmond, and Pasch, and alleged negligence by RSM, Schmidt, and Klintworth. They also alleged fraud and civil conspiracy by Curtis Mallet, Bricker, RSM, Schmidt, and Klintworth, and sought declaratory judgment ordering these defendants to indemnify and hold harmless these plaintiffs from all damages arising from the defendants' negligence.
¶12 The Shockleys and, later, corporation shareholder Terence Kelly (collectively, "the intervening plaintiffs"), successfully moved to intervene and filed intervenors' complaints against the same set of defendants, with allegations paralleling those in the operative complaint filed by the initial plaintiffs. Litigation in the circuit court was delayed in part to await resolution of the separate tax litigation, which was eventually resolved against the shareholders.
¶13 In February 2018, the initial plaintiffs and the intervening plaintiffs, together with all defendants, filed a joint motion for the court to recognize a set of settlements under a Pierringer release. Under the release, all defendants except Murphy Desmond and Pasch were settling as joint tortfeasors, leaving Murphy Desmond and Pasch as the sole remaining defendants for trial. We refer to the set of defendants who settled using the Pierringer release as "the settling defendants." The circuit court accordingly entered a final judgment resolving: all claims by the initial plaintiffs and intervening plaintiffs against the settling defendants; all cross-claims in either direction between the settling defendants...
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