Capsavage v. Esser

• Decision Date: 13 January 1999
• Docket Number: No. 97-2886,97-2886
• Citation: 224 Wis.2d 404,591 N.W.2d 888
• Parties: Patricia CAPSAVAGE and John Capsavage, Plaintiffs-Respondents, d v. Raymond J. ESSER, d/b/a Sundance Marine and/or San Diego Sea Ray, Defendant-Appellant.
• Court: Wisconsin Court of Appeals

Page 888

591 N.W.2d 888

224 Wis.2d 404

Patricia CAPSAVAGE and John Capsavage, Plaintiffs-Respondents, ^d v. Raymond J. ESSER, d/b/a Sundance Marine and/or San Diego Sea

Ray, Defendant-Appellant.

No. 97-2886.

Court of Appeals of Wisconsin.

Submitted on Briefs Nov. 30, 1998.

Opinion Released Jan. 13, 1999.

Opinion Filed Jan. 13, 1999.

[224 Wis.2d 406] On behalf of the defendant-appellant, the cause was submitted on the briefs of Janice A. Rhodes of Kravit & Gass, S.C. of Milwaukee.

On behalf of the plaintiffs-respondents, the cause was submitted on the brief of William R. Steinmetz and [224 Wis.2d 407] Kanmani H. Kriozere of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, S.C. of Milwaukee.

Before BROWN, NETTESHEIM and ANDERSON, JJ.

ANDERSON, J.

Raymond J. Esser appeals from a judgment holding him personally liable for the breach of a contract between Sundance Marine (d/b/a San Diego Sea Ray) and Patricia and John Capsavage. The Capsavages sued Esser, a fifty-percent shareholder in Sundance Marine, when that company failed to deliver the yacht the Capsavages purchased. The trial court concluded that San Diego Sea Ray was an unincorporated agent and had failed to disclose its corporate principal (Sundance Marine) to the Capsavages, and, on this basis, attributed personal liability to Esser, a corporate shareholder of Sundance Marine. On appeal, Esser asserts that he is entitled to protection from liability as a shareholder of Sundance Marine. He argues that personal liability only attaches to him if he is directly involved or actually participates in the transaction or contract. We agree; therefore, the judgment against Esser for breach of contract is reversed.

FACTS

In June 1990, Esser invested in Sundance Marine, a boat dealership incorporated in California. Esser received an equal amount of corporation shares as his business partner and the only other shareholder, Roy L. Gaertig. The Sundance Marine articles of incorporation were then amended listing Gaertig as the corporation's president and Esser as its chief financial officer and secretary. Also in June 1990, Sundance Marine opted to do business under the name San Diego Sea Ray (hereinafter SDSR).

On October 12, 1991, the Capsavages contracted with SDSR to purchase a sport yacht. At that time, the Capsavages tendered a check to SDSR for $60,000 as a down payment. Shortly thereafter, the Capsavages paid the remaining balance of $231,987.50. During this transaction, the Capsavages dealt exclusively with an SDSR salesperson.

In the purchase agreement, SDSR reserved the right to display the yacht at an upcoming boat show. At the boat show, someone wanted to buy the Capsavages' yacht. SDSR, again communicating through a salesperson, proposed to the Capsavages that if they allowed the interested individual to purchase their yacht, then the amount they paid for it could be applied as a down payment for a larger yacht. The Capsavages agreed and signed the purchase agreement for the larger yacht for $421,596.63 on February 28, 1991. The boat dealership signed both purchase agreements as "San Diego Sea Ray."

Meanwhile, SDSR's operations were not running smoothly. The boat dealership had serious money problems. As a result of "not sufficient funds" checks it had issued, SDSR was "out of trust" with its financing companies and overdrawn on its bank account. At trial, Esser testified that he was not involved in the day-to-day operations of the company and that Gaertig made 99.9% of the business decisions. The details of SDSR's dire financial situation became clear after an audit was The Capsavages never received a boat from SDSR. SDSR stopped doing business in March 1992. By this time, the Capsavages had paid $291,987.50 to SDSR for a boat that they had never received. SDSR had resold the first yacht the Capsavages purchased, but never ordered the larger model or forwarded the payment to the yacht manufacturer.

conducted by the yacht manufacturer's credit department. Apparently, the dealership had sold boats and had not forwarded the payments for those boats to the manufacturer; instead, SDSR used the funds to cover its operating expenses. In spite of Gaertig's apparent [224 Wis.2d 409] financial mismanagement of SDSR, Esser infused capital and made personal guarantees with creditors to keep SDSR's doors open.

The Capsavages filed suit against Esser for, among other things, breach of contract. The Capsavages contended that SDSR was not a corporation and did not present itself as one in its business dealings. Therefore, SDSR was a joint venture or partnership, and as its agent, Esser was personally liable for its debt.

In his defense, Esser argued that he should not be held liable as an agent who failed to disclose the principal because he "had absolutely no involvement in the transaction." Furthermore, he contended that SDSR was the trade or "d/b/a" name for Sundance Marine, a California corporation. Thus, Esser argued that he is shielded from liability as a corporate shareholder.

After a trial to the court, Esser was found personally liable for the contract breach. In an oral decision, the court stated, "You can't avoid liability if the entity is being operated behind the scenes in the manner that we have here improperly." To support its conclusion that the "Capsavages were never sufficiently apprised of the [corporate] status," the court found the following facts: the salesperson did not mention this fact to them; the corporate status was not sufficiently indicated on SDSR stationery, the dealership's building or when it signed things; no regular bookkeeping occurred; and there was an absence of tax returns, books and ledgers. The court held that a situation "fraught with problems" weighed "against the limited liability that [Esser] is asserting as a defense."

Mr. Esser [was] too close to the fire, too close to the operation, too close to the things that Mr. Gaertig was doing wrong; and as far as dealing with the public the analysis is that there's a duty to disclose the--properly the corporate status .

[T]he improper operations here in the court's mind make the case for finding that Mr. Esser is liable for the Capsavage transaction.

Judgment was entered in favor of the Capsavages and damages were assessed against Esser in the amount of $384,553.73. Esser appeals.

DISCUSSION

The crux of Esser's appeal is that as a corporate shareholder he should be shielded from personal liability for a contract made by the corporation. Indeed, it is a long-standing rule in Wisconsin that a corporation's shareholders are not individually liable for contracts made by the corporation's officers or agents. See Sprecher v. Weston's Bar, Inc., 78 Wis.2d 26, 37, 253 N.W.2d 493, 498 (1977). Thus, corporate shareholders enjoy limited liability. "The purpose of limited liability is to promote commerce and industrial growth by encouraging shareholders to make capital contributions to corporations without subjecting all of their personal wealth to the risks of the business." Consumer's Co-op. v. Olsen, 142 Wis.2d 465, 474, 419 N.W.2d 211, 213-14 (1988) (quoted source omitted). However, this rule is not absolute. An exception will be made to metaphorically "pierce the corporate veil" and thus disregard the corporate entity and attach liability to shareholders in the following instance: where the corporation's "affairs are organized, controlled and conducted so that the corporation has no separate existence of its own and is the mere instrumentality of the shareholders and the corporate form is used to evade an obligation, to gain an unjust advantage or to commit an injustice." Id. at 476, 419 N.W.2d at 214 (quoted source omitted).

In response, the Capsavages argue that common law principles of agency also apply here. See generally Benjamin Plumbing, Inc. v. Barnes, 162 Wis.2d 837, 848-56, 470 N.W.2d 888, 893-96 (1991) (Benjamin Plumbing II ). Under agency principles, when making a contract, the contracting party must be informed if the principal is a corporation. See id. at 851, 470 N.W.2d at 894. In general, a contracting party's expectation is that the agent will be personally liable on the contract. See id. at 850, 470 N.W.2d at 894.

It is the agent who seeks to escape liability who has the burden of proving that the principal's corporate status was disclosed. Such a duty of disclosure creates no hardship on agents, for it is within their power to relieve themselves of liability. Conversely, the contracting party does not have any duty to inquire into the corporate status of the principal even when it is within that party's capability of doing so. As a matter of fairness, the contracting party should not be saddled with the burden of "ferret[ing] out the record ownership" of the principal's business.

Id. at 851, 470 N.W.2d at 894 (citations omitted).

Furthermore, the rules of agency proclaim that where the principal is only partially disclosed, the agent can be held liable on the contract. See id. at 848, 470 N.W.2d at 893. From this rule has developed a corollary rule: if an agent only partially discloses the principal's corporate status to the contracting party, the agent is liable. See id. This is termed the "undisclosed principal" theory of liability.

In reply, Esser asserts that "[a] corporate shareholder cannot be held personally liable for a corporate debt because he made financial contributions to the corporation while another shareholder mismanaged the corporation's business." He claims that the court "took a flying leap from its finding that a buyer had no notice of a seller's corporate status and somehow landed on the conclusion that a shareholder who made capital contributions must be personally liable for the corporation's debts." He argues that the court treated an agent's failure to disclose the corporate principal as equivalent to a disregard of corporate formalities. ¹ Consequently, Esser contends that the trial court applied an incorrect...