Grafft v. Jensen, No. 2006AP1793 (Wis. App. 7/12/2007)

• Decision Date: 12 July 2007
• Docket Number: No. 2006AP1793.,2006AP1793.
• Parties: James Grafft, Plaintiff-Appellant-Cross-Respondent, v. Donald G. Jensen, Jr. and Equity Management Services, Inc., Defendants-Respondents-Cross-Appellants.
• Court: Wisconsin Court of Appeals

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James Grafft, Plaintiff-Appellant-Cross-Respondent, v. Donald G. Jensen, Jr. and Equity Management Services, Inc., Defendants-Respondents-Cross-Appellants.

No. 2006AP1793.

Court of Appeals of Wisconsin, District IV.

Opinion Filed: July 12, 2007.

APPEAL and CROSS-APPEAL from a judgment of the circuit court for Rock County: MICHAEL J. BYRON, Judge. Affirmed in part; reversed in part and cause remanded with directions.

Before Dykman, Vergeront and Bridge, JJ.

¶ 1 DYKMAN, J

James Grafft appeals from a judgment following a bench trial awarding Grafft zero dollars in his negligence action against his former accountant, Donald Jensen. Grafft contends that the circuit court erred in refusing to apply the collateral source doctrine to prevent reducing Grafft's damages by money he obtained from third parties, in reducing Grafft's damages by the amount the court found Grafft had mitigated through his own actions, and in holding that certain damages were not recoverable. We conclude that the circuit court erred in finding that certain damages were not recoverable based on public policy. We uphold the circuit court's factual determinations as to the amount of damages Grafft suffered as a result of Jensen's negligent conduct. Because the court did not make all the findings necessary to determine the amount Grafft may recover based on our conclusion that all the claimed items are recoverable, we remand for those findings.

¶ 2 Jensen cross-appeals from the portion of the judgment finding Jensen negligent. Jensen argues that the circuit court erred in finding that Grafft's negligence action was not barred by the statute of limitations, that Jensen owed a duty to Grafft and breached that duty, and that Jensen could be personally liable for the claimed negligence. Jensen also argues that the circuit court erred in failing to allocate negligence to other parties. We reject each of Jensen's contentions, and affirm those portions of the court's judgment that Jensen challenges.

Background

¶ 3 The following is taken from trial testimony and the circuit court's findings. In 1990, Rusty Schoville formed Injection Technologists, Inc. (ITI). ITI manufactured custom plastic-injection-molded components. In 1992, James Grafft purchased twenty-five percent of the shares in ITI. At that time, Schoville owned fifty percent of the stock in ITI and Schoville's brother and sister-in-law, Fred and Rhonda Schoville, owned the remaining twenty-five percent. Subsequently, Grafft made a personal loan of $125,000 to ITI to purchase machinery. Grafft's personal loan to ITI was secured by equipment owned by ITI. In 1996, Grafft purchased Fred and Rhonda Schoville's shares, making Grafft and Schoville each fifty percent shareholders in ITI. Schoville was president of ITI and handled all of the day-to-day operations of the business. Grafft served in an advisory position on the board of directors and as an officer.

¶ 4 In 1993, Johnson Bank loaned ITI $56,000. Between 1993 and 1996, the bank had an ongoing financial relationship with ITI, extending ITI up to $90,000 worth of credit. Because ITI was not profitable during that time, the bank became unwilling to extend further credit. However, the bank expressed to ITI that it would be willing to extend additional credit to ITI if the loan was personally guaranteed by Grafft, because Grafft had a strong credit history with the bank. In August 1996, Grafft personally guaranteed a loan from the bank to ITI for $ 60,000. Grafft signed two additional guarantees with Johnson Bank so that the bank would extend more credit to ITI between 1996 and 1999: a $60,000 guaranty in 1998, and a $20,000 guaranty in 1999.

¶ 5 In 1999, following continued financial difficulties, ITI ceased operations. ITI owed $117,276 on Grafft's personal loan to ITI and the balance on several loans from Johnson bank. Johnson Bank took an active role in trying to collect the amount owed to it by ITI. The bank collected receivables as they came to ITI to begin reducing the debt ITI owed. In January 2000, the bank decided it had recovered all it could through ITI, and demanded payment from Grafft in the amount remaining outstanding on his personal guarantees. To satisfy his personal guaranty to the bank, Grafft borrowed $58,444.86 from his personal line of credit with Johnson Bank and applied it to the balance owed by ITI. In exchange, the bank assigned to Grafft two promissory notes signed by ITI totaling $120,000. The bank also assigned to Grafft its first-position security interest in ITI's assets. Thus, after the exchange between Grafft and the bank in January 2000, Grafft had personally paid $58,444.86 on his personal guaranty for the bank's loan to ITI,¹ and received from the bank its security interest in ITI's assets. Grafft took possession of the assets to satisfy ITI and Schoville's debts to him.² Grafft then used the assets he acquired from ITI and began a new business, Pro Plastics of Wisconsin, LLC.

¶ 6 In 2000, after ITI ceased operations, Grafft obtained payroll histories of ITI that had been retained by ITI's accounting firm, Equity Management Services ("EMS"). The payroll records revealed that Schoville had taken multiple paychecks within single pay periods from 1996 until ITI ceased operations, increasing his annual salary beyond the amount agreed by the shareholders. Grafft testified that he first learned that Schoville had taken unauthorized paychecks when he reviewed the paychecks at EMS.

¶ 7 EMS is owned and operated by Donald Jensen. Jensen and other employees of EMS provided non-CPA accounting services to ITI. Grafft testified that in the course of his involvement with ITI, he reviewed financial statements issued by Jensen and relied on them in making financial decisions. Jensen did not notify Grafft that Schoville was taking multiple paychecks, either through the financial statements EMS issued to Grafft or by any other means. Grafft brought this negligence action against Jensen and EMS, claiming as damages his lost investment in ITI of $35,625; the $117,276 balance still owing on his personal loan to ITI; and the $58,444.86 he had to pay on his guaranty to the bank. These damages total $211,345.86.³

¶ 8 Jensen's expert witness, accountant David Bagley, testified that he calculated Grafft's damages due to Jensen's negligence as zero. Bagley reached that figure by totaling Grafft's losses on his investment in ITI, his personal loan to ITI, and his guaranty to Johnson Bank, as claimed (totaling $211,346) reduced by the amount Bagley calculated Grafft gained through acquiring ITI assets in the form of accounts receivable, inventory, and fixed assets (ranging from $ 122,495 to $160,164); first year profits generated by Pro Plastics ($ 145,368); and Grafft's estimated tax savings from his bad debt deduction (ranging from $17,591 to $41,047). This resulted in a net gain to Grafft ranging from $74,108 to $135,233.

¶ 9 The court found that Schoville had embezzled from ITI by taking unauthorized duplicate checks, and that Jensen knew of the embezzlement and was negligent in failing to notify Grafft. The court also found that Grafft was fifty percent negligent based on his knowledge of Schoville's past misconduct and Grafft's failure to act over the course of Schoville's embezzlement. The court found that Grafft's initial investment in ITI and his personal loan to ITI were not recoverable based on public policy factors. It found that Grafft's second purchase of stock for $25,000 and Grafft's payment of $58,444.86 on his guaranty were recoverable damages, for a total of $83,444.86. However, the court found that any damages Grafft suffered as a result of Jensen's negligence were offset by his acquiring the assets of ITI, which the court valued at the average of the range offered by Bagley: $141,329.50. Grafft appeals from the damages award, and Jensen cross-appeals from the judgment finding him negligent.

Discussion

¶ 10 Grafft argues that the circuit court erred in determining the amount of his recoverable damages. The parties dispute the standard of review we should apply to determine whether the court properly awarded damages. Grafft asserts our review is de novo, because it involves the application of legal doctrines to undisputed facts. See Nottelson v. DILHR, 94 Wis. 2d 106, 115-16, 287 N.W.2d 763 (1980). Jensen, in turn, asserts that we may only review a damages award to determine if the award is within reasonable limits, viewing the evidence in the light most favorable to support the award. See Cords v. Anderson, 80 Wis. 2d 525, 552-53, 259 N.W.2d 672 (1977). We agree with both contentions, and conclude that our review of the circuit court's damages award involves a mixed question of fact and law. We will uphold the circuit court's factual findings unless they are clearly erroneous. WIS. STAT. § 805.17(2). We will uphold the court's determination of the damages Grafft suffered due to Jensen's negligence unless it is unreasonable. See Cords, 80 Wis. 2d at 552-53. However, we independently determine whether the disputed legal doctrines apply to the facts of this case. See Nottelson, 94 Wis. 2d at 115-16.

¶ 11 Grafft contends that the circuit court erred in denying two of his claimed items of damages: his initial investment in ITI, and his personal loan to ITI. He argues that the court erroneously denied those items of damages on public policy grounds. We agree.

¶ 12 The circuit court found that Grafft's losses of his $10,275 initial investment in ITI and the $117,276 remaining owing on his personal loan to ITI were not recoverable based on public policy factors, relying on Citizens State Bank v. Timm, Schmidt & Co., 113 Wis. 2d 376, 386, 335 N.W.2d 361 (1983). In Timm, Clintonville Fire Apparatus, Inc. (CFA) hired Timm, an accounting firm, to prepare its financial statements. Id. at 378. During the time that Timm was providing financial services to CFA, Citizens State Bank loaned CFA a total of...