Ehlinger v. Hauser, 2007AP477.

• Court: United States State Supreme Court of Wisconsin
• Writing for the Court: ANN WALSH BRADLEY
• Citation: 2010 WI 54,785 N.W.2d 328,325 Wis.2d 287
• Parties: William N. EHLINGER, Plaintiff-Respondent-Cross-Appellant-Cross-Petitioner, v. Jon A. HAUSER and Evald Moulding, Inc., Defendants-Appellants-Cross-Respondents-Petitioners.
• Docket Number: No. 2007AP477.,2007AP477.
• Decision Date: 25 June 2010

325 Wis.2d 287
785 N.W.2d 328
2010 WI 54

William N. EHLINGER, Plaintiff-Respondent-Cross-Appellant-Cross-Petitioner,
v.
Jon A. HAUSER and Evald Moulding, Inc., Defendants-Appellants-Cross-Respondents-Petitioners.

No. 2007AP477.

Supreme Court of Wisconsin.

Argued Sept. 15, 2009.
Decided June 25, 2010.

**329 For the defendants-appellants-cross-respondents-petitioners there were briefs by Gary A. Ahrens, Daniel J. Vaccaro, Monica M. Riederer, and Michael Best & Friedrich LLP, Milwaukee, and Kristen L. Hauser, Watertown, and oral argument by Gary A. Ahrens.

For the plaintiff-respondent-cross-appellant-cross-petitioner there were briefs by Timothy W. Feeley, Sara J. MacCarthy, and Hall, Render, Killian, Heath & Lyman, P.C., Milwaukee, and oral argument by Timothy W. Feeley.

ANN WALSH BRADLEY, J.

325 Wis.2d 290

¶ 1 This case is before the court on a petition and a cross-petition for review of a **330 decision of the court of appeals.¹ It involves a contractual dispute between Jon Hauser ("Hauser") and Robert Ehlinger ("Ehlinger"), who are the joint and equal

325 Wis.2d 291

shareholders of Evald Moulding, Inc. ("Evald"), a Wisconsin corporation located in Watertown. The parties' Buy-Sell Agreement provides that if one of the shareholders becomes totally disabled, the non-disabled shareholder is entitled to purchase his shares at "book value."

¶ 2 Hauser contends that both the circuit court and court of appeals incorrectly concluded that the buyout agreement is unenforceable. First, he asserts that the circuit court erred when it determined that the undefined term "book value" rendered the buyout agreement unenforceable. Second, Hauser argues that the court of appeals incorrectly determined that supporting documentation is a necessary component of a computation under generally accepted accounting practices ("GAAP"). Third, he asserts that the circuit court erroneously exercised its discretion when it denied him further opportunity to challenge and counter the special magistrate's conclusions. He argues that the meaning of "book value" is ambiguous and that he is entitled to a trial to determine the intent of the parties.

¶ 3 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.

¶ 4 Additionally, to the extent that Hauser's characterization of the court of appeals' decision is accurate, we determine that his argument about the scope of

325 Wis.2d 292

GAAP fails. The question is not what is required under GAAP, but what is required to determine the parties' rights.

¶ 5 Finally, we 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.

¶ 6 In his cross-petition, Ehlinger argues that the circuit court erroneously permitted the defendants' litigation expenses to be paid by the corporation. This decision would not be erroneous if Hauser was entitled to indemnification or if Evald spent its assets in its own defense. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855 (2007-08).² Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense. Therefore, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser's litigation expenses.³

**331

325 Wis.2d 293

¶ 7 Accordingly, we affirm the court of appeals as modified in this opinion and remand to the circuit court for the appointment of a receiver.⁴

I

¶ 8 The procedural history of this case is lengthy. It encompasses over seven years of litigation between two former friends, William Ehlinger and Jon Hauser, the sole and equal shareholders of Evald Moulding, Inc. Both men are corporate officers, but Hauser manages Evald's day-to-day operations.⁵

¶ 9 Evald's shareholders have not held a meeting since 2002, and they last successfully elected corporate officers in 1995. These failures are caused in part by an

325 Wis.2d 294

ongoing dispute over the provisions of a Buy-Sell Agreement executed by Ehlinger and Hauser in 1992.⁶

¶ 10 The agreement provides for the transfer of a disabled shareholder's shares upon total disability.⁷ The purchase price for the disabled shareholder's shares is set forth in the agreement as follows:

For transfers of all of a Shareholder's stock ... upon his becoming disabled, the purchase price of a Shareholder's shares of stock shall be $350,000.00 or Book Value whichever is greater.... For transfers of all of a Shareholder's stock on threat of involuntary transfer, the purchase price of a Shareholder's shares of stock shall be the book value of said shares as of the end of the last fiscal year.
The agreement was signed by Hauser and Ehlinger in their capacities as corporate **332 officers and as shareholders. Shortly after the parties signed the agreement, Ehlinger developed Parkinson's Disease.

¶ 11 In December 2000, Ehlinger and Hauser met for dinner at a restaurant in Watertown. According

325 Wis.2d 295

to Hauser's notes, Ehlinger said that he had lost interest in the business and asked Hauser to make an offer to purchase his shares. The parties did not agree to any buyout terms at the meeting, but they did agree that Ehlinger was entitled to inspect Evald's books.

¶ 12 On June 20, 2001, Hauser sent a letter to Ehlinger invoking the disability buyout agreement. He stated that he intended to initiate the process of buying out Ehlinger's entire interest in Evald. The letter explained:

According to Section 3 of the Agreement, when a shareholder becomes "totally disabled", that shareholder must sell their interest in Evald Moulding Company. Further, this section also states that the other shareholder has the first right to purchase this interest. Jon Hauser will act on this right to purchase your interest in Evald Moulding Company.

Hauser enclosed Evald's most recent fiscal year-end statement. Based on that statement, Hauser calculated the book value of Ehlinger's shares to be $431,400 and explained that the first payment installment would be sent "immediately upon the acceptance of this purchase offer." Ehlinger did not accept Hauser's offer.

¶ 13 Ehlinger called a meeting of the shareholders on April 22, 2002. He moved that Evald's books be audited in order to determine the value of the corporation, but Hauser declined to second the motion. The shareholders also attempted to hold their annual election of corporate officers, but due to deadlock, they were unable to do so.⁸

¶ 14 Hauser attempted to hold a closing on Ehlinger's shares. On April 30, he sent Ehlinger a check

325 Wis.2d 296

for $86,280, 20 percent of what Hauser calculated to be the book value of the shares. Ehlinger refused the offer and never cashed the check.

¶ 15 Ehlinger filed suit seeking judicial dissolution. He alleged that the shareholders of the corporation were at an impasse and had failed to elect officers for more than two successive years.

¶ 16 He also sought a declaratory judgment that the buyout agreement was "unenforceable for lack of essential terms," including the definition and means of determining "book value." Further, Ehlinger contended that even if the contract was enforceable, "determining the true book value would be difficult or impossible due to the way the defendant has kept Evald's books." He asserted that "[b]ecause of the ambiguity of the agreement and the defendant's subsequent actions there has never been a meeting of minds between the parties as to the meaning of book value in the 1992 Buy-Sell Agreement." ⁹

**333 ¶ 17 The parties engaged in discovery. Both parties submitted expert reports purporting to determine the book value and fair market value of Evald. Discovery was completed in September 2003.

325 Wis.2d 297

¶ 18 Ehlinger moved for summary judgment on two grounds. He argued that Hauser was not entitled to invoke the disability buyout agreement because Ehlinger was not "totally disabled" within the meaning of the agreement. Further, he sought summary judgment ordering the judicial dissolution of Evald due to shareholder impasse.

¶ 19 Hauser argued that no such impasse existed because the corporation had initiated the process of buying out Ehlinger's shares. As a result, Hauser contended, Ehlinger could dispute the price Evald would pay for the shares but he no longer had the authority to vote the shares. Hauser moved for summary judgment declaring that he had validly exercised the disability buyout agreement.

¶ 20 The court issued an order on January 12, 2004. It declined to grant summary judgment to either party regarding the enforceability or applicability of the buyout agreement. Instead, it concluded that there were material issues of fact in dispute.

¶ 21 Further, finding that the shareholders were deadlocked and had failed to elect officers for more than two successive years, the court ordered judicial dissolution pending resolution of the contract issue:

The plaintiff's motion for summary judgment ordering the dissolution and liquidation of Evald Moulding Company, Inc. ... and appointing a receiver to make an accounting of the financial affairs of Evald and to dispose of its business for the benefit of its shareholders is granted pending resolution of the parties dispute about defendant's exercise of the option to purchase plaintiff's shares. If defendant prevails, plaintiff's claim for dissolution will be moot. If plaintiff prevails,

...