Beloit Liquidating Trust v. Grade

• Citation: 270 Wis.2d 356,2004 WI 39,677 N.W.2d 298
• Decision Date: 06 April 2004
• Docket Number: No. 02-2035.,02-2035.
• Parties: BELOIT LIQUIDATING TRUST, a Delaware Trust, Plaintiff-Appellant, v. Jeffrey T. GRADE, Francis M. Corby, Jr., Mark E. Readinger, James A. Chokey, Robert A. Messier, Alton L. Daffin, and Thomas E. Engelsman, Defendants-Respondents-Petitioners.
• Court: Wisconsin Supreme Court

270 Wis.2d 356

2004 WI 39

677 N.W.2d 298

BELOIT LIQUIDATING TRUST, a Delaware Trust, Plaintiff-Appellant, v. Jeffrey T. GRADE, Francis M. Corby, Jr., Mark E. Readinger, James A. Chokey, Robert A. Messier, Alton L. Daffin, and Thomas E. Engelsman, Defendants-Respondents-Petitioners.

No. 02-2035.

Supreme Court of Wisconsin.

Oral argument February 19, 2004.

Decided April 6, 2004.

For the defendant-respondent-petitioner Engelsman there were briefs by Gregory A. Kotsonis and VonBriesen & Roper, S.C., Milwaukee and Mitchell Bryan and Levenfeld Pearlstein, Chicago, and oral argument by Mitchell Bryan.

For the defendants-respondents-petitioners Chokey, Readinger, Messier & Daffin there were briefs by Paul F. Linn, Christopher C. Mohrman, Charles J. Crueger, and Michael Best & Friedrich, LLP, Milwaukee, and oral argument by Paul F. Linn.

For the defendants-respondents-petitioners Grade and Corby there was a brief by Christopher T. Hale, K. Scott Wagner and Hale & Wagner, S.C., Milwaukee.

For the plaintiff-appellant there were briefs by John F. Hovel, Leonard G. Leverson and Kravit, Gass, Hovel & Leitner, S.C., Milwaukee, and Curtis C. Mechling and Stroock & Stroock & Lavan, LLP, New York, and oral argument by Curtis C. Mechling.

¶ 1. N. PATRICK CROOKS, J

The petitioners in this case, Jeffrey T. Grade, Francis M. Corby, Jr., Mark E. Readinger, James A. Chokey, Robert A. Messier, Alton L. Daffin, and Thomas E. Engelsman, officers and directors of Beloit Corporation, or its former parent corporation, Harnischfeger Industries, Incorporated (Harnischfeger), seek review of a published court of appeals' decision, Beloit Liquidating Trust v. Grade, 2003 WI App 176, 266 Wis. 2d 388, 669 N.W.2d 232, reversing a circuit court decision. The court of appeals held that the petitioners (officers and directors) had a duty to Beloit Corporation's creditors before it went out of business. The circuit court dismissed the supplemental complaint filed by Beloit Corporation Liquidating Trust (Trust), which alleged that the officers and directors breached their fiduciary duties. The circuit court held that no duty is owed to the creditors of a corporation unless the corporation is both insolvent and no longer a going concern. The court of appeals reversed the circuit court, concluding that the officers and directors had a duty to the creditors before Beloit Corporation went out of business. The court of appeals further concluded that Delaware, not Wisconsin, law was applicable to the present case. The court of appeals also held that the petitioners were precluded from asserting 11 U.S.C. § 108(a) (1999)¹ as a defense, and the Official Committee of Unsecured Creditors of Beloit Corporation (Committee) could use § 108(a) to extend the statute of limitations for its breach of fiduciary duty claims.

¶ 2. We conclude that, given the legislature's enactment of Wis. Stat. § 180.1704 (1999-2000)² and the prevailing Wisconsin case law regarding choice of law, Wisconsin law applies in this case. Primarily relying on the decisions of Boyd v. Mutual Fire Ass'n, 116 Wis. 155, 90 N.W. 1086 (1902), and McGivern v. Amasa Lumber Co., 77 Wis. 2d 241, 252 N.W.2d 371 (1977), we further conclude that, in order for officers and directors to have a fiduciary duty to creditors, a corporation must be both insolvent and no longer a going concern. Because Beloit Corporation was a going concern during the applicable two-year period in which a claim could have been brought, we conclude that its officers and directors owed no duty to its creditors during that time. Given these conclusions, we do not need to address the court of appeals' holding regarding issue preclusion in this case.

I

¶ 3. For approximately 140 years, Beloit Corporation designed and manufactured pulp and papermaking machines. Beloit Corporation was a profitable corporation for many of those years and reported an operating income of over $65 million as late as 1995. Although Beloit Corporation was organized under the laws of Delaware, its primary place of business was located in Beloit, Wisconsin. Beloit Corporation also operated 65 wholly-owned or partially-owned subsidiaries, including subsidiaries located in the United Kingdom, Asia, Italy, Poland, and Austria. Harnischfeger was organized under Delaware law as well, and its principal place of business was in Milwaukee County, Wisconsin. Harnischfeger owned 80 percent of Beloit Corporation, while Mitsubishi Heavy Industries owned the remaining 20 percent of the corporation.

¶ 4. On June 7, 1999, Harnischfeger, Beloit Corporation, and all of the other businesses owned by Harnischfeger filed for bankruptcy protection in Delaware under Chapter 11 of the United States Code.³ At the time of filing, Beloit Corporation's reported liabilities exceeded its reported assets by more than $1 billion. While bankruptcy proceedings were pending, the bankruptcy court appointed the Committee to explore potential conflicts of interest between debtors and related parties. The Committee then sought the right to sue, on behalf of Beloit Corporation, the current and former officers and directors of Beloit Corporation and Harnischfeger for their alleged mismanagement of Beloit Corporation and breach of fiduciary duty.

¶ 5. The bankruptcy court confirmed Beloit Corporation's reorganization plan on May 18, 2001. According to the plan, Beloit Corporation's unsecured creditors were given the right to share in the proceeds resulting from the liquidation of Beloit Corporation's assets. The unsecured creditors were also given title to Beloit Corporation's potential claims, including the claims of Beloit Corporation asserted in this action. On June 5, 2001, the bankruptcy court permitted Beloit Corporation's unsecured creditors to initiate this action. On June 7, 2001, the Committee commenced this action in Milwaukee County Circuit Court.

¶ 6. On July 12, 2001, the Trust was created to liquidate Beloit Corporation's remaining assets. The Trust filed a supplemental complaint, in which the Trust was substituted as the plaintiff in this action in place of the Committee. Aside from general claims of mismanagement and corporate waste, the Trust cited two major events as contributing to the demise of Beloit Corporation. First, the Trust alleged in its complaint that the directors and officers breached their duties in 1994 by entering into a contract to build a de-inking and pulping mill in Fitchburg, Massachusetts. According to the Trust, Beloit Corporation never fulfilled its contractual obligations to the mill. The mill closed two years later, and its owner filed bankruptcy. The directors and officers of Beloit Corporation decided that, instead of forfeiting their sizeable investment, they would take over the mill and resume its operation. Beloit Corporation assumed the mill's lease obligations, and the corporation invested more money in the project. The mill continued to sustain substantial losses, and the bankruptcy court authorized Beloit Corporation to cease the mill's operations in July 1999.

¶ 7. The second event cited by the Trust as leading to the demise of Beloit Corporation occurred in 1996. The officers and directors concluded that, in order for Beloit Corporation to regain some of its market share, it needed to expand its business dealings abroad. Thus, Beloit Corporation, through its wholly-owned subsidiary, Beloit Corporation Asia Pacific, Incorporated, entered into two contracts with Asia Pulp and Paper Company (Asia Pulp), the largest Indonesian pulp and paper producer, to build and install two large fine paper machines in Indonesia. The complaint alleged that there were substantial cost overruns on these first two contracts because the officers and directors miscalculated various start-up and construction costs.

¶ 8. Beloit Corporation then decided to enter into two more contracts with Asia Pulp. However, due to its dissatisfaction with Beloit Corporation's performance on the first two contracts, Asia Pulp ultimately cancelled the second two contracts at a substantial loss to Beloit Corporation. The Trust alleged that the decision of the officers and directors to enter into these contracts resulted in a breach of the officers' and directors' fiduciary duties. The Trust further alleged that the officers and directors attempted to conceal the losses from the Asia Pulp contracts. The complaint acknowledged, however, that losses incurred from those contracts were disclosed on Beloit Corporation's March 1998 financial statements.

¶ 9. The Trust further alleged that, beginning in 1996, the officers and directors should have managed Beloit Corporation for the benefit of the unsecured creditors. The complaint alleges that Beloit Corporation was rapidly losing its market share in 1995. The complaint alleged that, by early 1996, Beloit Corporation was able to pay its outstanding debt only by virtue of hundreds of millions of dollars in loans from Harnischfeger. According to the complaint, Beloit Corporation was continuously insolvent as early as 1996. From 1995 to 1999, the officers and directors allegedly mismanaged Beloit Corporation and drove it further into insolvency by negligently entering into contracts the corporation was incapable of performing.

¶ 10. The Trust asserted that the officers and directors breached their fiduciary duties to Beloit Corporation and its creditors. The complaint alleged that, during the time when Beloit Corporation was insolvent or near insolvency, the directors and officers negligently allowed the corporation to enter into money-losing contracts, failed to keep adequate accounting systems to deal with the losses, continued operations after prudent managers would have shut the corporation down, and failed to disclose the corporation's losses.

¶ 11. The officers and directors answered the Trust's complaint and moved for judgment on the pleadings.⁴ Their motion alleged that the creditors' breach of fiduciary duties...