Kaiser, Matter of

• Decision Date: 12 June 1986
• Docket Number: No. 85-1732,85-1732
• Parties: In the Matter of Lawrence KAISER, as Trustee of the Estates of Telemark Management Company, Inc., et al., Debtors. Appeal of Sheila WISE and Anthony Wise.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 73

791 F.2d 73

55 USLW 2022

In the Matter of Lawrence KAISER, as Trustee of the Estates of Telemark Management Company, Inc., et al., Debtors Appeal of Sheila WISE and Anthony Wise.

No. 85-1732.

United States Court of Appeals Seventh Circuit.

Argued April 22, 1986.

Decided May 13, 1986.

Rehearing and Rehearing En Banc Denied June 12, 1986.

Anthony Wise, pro se.

Stephen H. Cohen, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for appellee.

Before CUMMINGS, Chief Judge, and BAUER and POSNER, Circuit Judges.

POSNER, Circuit Judge.

The appellants in this bankruptcy matter, Mr. and Mrs. Wise, are the sole owners of a group of corporations that we shall refer to collectively as "Telemark" and that own a resort and associated recreational facilities (including a theme park called "Historyland") in northwestern Wisconsin. Telemark went broke and passed into the control of a trustee, the appellee in this case, under Chapter 7 of the Bankruptcy Code. The trustee claimed that some property formally or nominally owned by the Wises rather than by Telemark--in particular, four parcels of land on which "Historyland" is built and several hundred pieces of furniture, equipment, and artwork (chairs, ladders, signs, some Indian artifacts, etc.)--was actually part of the bankrupt estate. The bankruptcy judge agreed, and so did the district judge, to whom the Wises first appealed; now they appeal to us. (Other categories of property are involved in the appeal, but they either are no longer in issue or present a much clearer case for inclusion in the estate; we shall not have to discuss them separately.) The bankruptcy judge's order, although it did not wind up the whole bankruptcy proceeding, disposed finally of the controversy between the trustee and the Wises over who has the right to the property in question, and was thus an appealable order. See In re Barker, 768 F.2d 191, 192-94 (7th Cir.1985); Bestmann v. Nicola, 720 F.2d 484, 486 (8th Cir.1983).

The trustee had a buyer for Telemark who was prepared to pay some $5 million; but when we granted a stay (herewith dissolved) pending this appeal, the deal fell through, though we are told the buyer is still interested. Telemark's total liabilities are about $13 million. The trustee was operating Telemark as a resort until the stay was granted. Telemark has now closed but if bought will be reopened.

The Bankruptcy Code provides that the bankrupt estate includes "all legal or equitable interests of the debtor in property as of the time of the commencement of the case." 11 U.S.C. Sec. 541. We must decide whether the debtor (Telemark) was the equitable owner of the land and personal property in question under Wisconsin law. The rights enforced in bankruptcy are rights created by state law, Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), in this case Wisconsin law.

We begin with the land. Wise bought it many years ago, using borrowed money to buy two of the four parcels. Telemark built "Historyland" on the four parcels but never leased the parcels from Wise or paid rent for their use. Telemark, not Wise, repaid the loans that he had taken out to buy two of the parcels, and also paid the real estate taxes on all four parcels. The interest on the loans was deducted on Telemark's, not the Wises', income tax returns. Wise has never listed the land on his personal financial statements. Together with some other land, the four parcels are listed as an asset of Historyland, Inc., one of the Telemark corporations, on Telemark's consolidated disclosure statement which Wise filed with the bankruptcy judge. The statement lists the appraised value of the land as $1 million and its net realizable value as $600,000, more than half of which is due to the four parcels in question. Since the four parcels are encumbered by an $8 million mortgage signed by both Telemark and Wise, the trustee as representative of the unsecured creditors might appear to have nothing to gain from adding the land to the bankrupt estate. But the mortgagee is willing to discharge the mortgage for $350,000, and both the trustee and the Wises think the land is worth more.

The parcels were formally in Wise's name, and prima facie therefore could not be reached by creditors of his corporations. The principle of limited liability, whereby a corporation's creditors cannot reach the personal assets of the shareholders (the shareholders' liability is limited to their investment in the corporation), is important to our capitalist system. It enables people to invest in business without hazarding their entire wealth on the venture. Refrigeration Sales Co. v. Mitchell-Jackson, Inc., 770 F.2d 98, 103 (7th Cir.1985). If it were not for limited liability, an investor who was risk averse would not invest equity capital in an enterprise that had debt, since if the enterprise failed its debts might exceed its assets; or would negotiate a waiver of personal liability with the lenders; or would charge a higher risk premium. He might insist that the enterprise buy insurance unlimited in amount (if this were possible) against any possible involuntary debt such as a large tort judgment. He might steer clear of equity investing altogether. We do not want to exaggerate the importance of limited liability; often the shareholders of closely held corporations such as Telemark will guarantee loans to the corporation in order to reduce the corporation's interest expense. Nevertheless, equity investments would be discouraged to some extent if shareholders could not limit their liability to their investment.

But like almost all legal principles, the principle of limited liability has exceptions. Creditors are sometimes allowed to "pierce the corporate veil" and reach the (ostensibly) personal assets of the shareholders; that is what the trustee, representing the unsecured creditors of Telemark, did to the Wises here. The rules under which the corporate veil may be pierced go by many names, none very informative, such as alter ego and equitable estoppel. See Henn, Handbook of the Law of Corporations 250 n. 2 (2d ed. 1970). Wisconsin courts have eschewed legalisms and allowed the corporate veil to be pierced, and the shareholder held personally liable, whenever limited liability would "defeat some strong equitable claim." E.g., Ruppa v. American States Ins. Co., 91 Wis.2d 628, 644, 284 N.W.2d 318, 324 (1979); Sprecher v. Weston's Bar, Inc., 78 Wis.2d 26, 37-38, 253 N.W.2d 493, 498 (1977). This is becoming a standard approach. See, e.g., Meiners, Mofsky & Tollison, Piercing the Veil of Limited Liability, 4 Del. J. Corp. L. 351, 354 (1979).

A common situation in which limited liability is disregarded is where the shareholder has misrepresented his personal assets as corporate assets in order to get some advantage with creditors. Suppose a controlling shareholder such as Wise persuades a lender to extend credit on favorable terms to the shareholder's corporation by representing that the corporation has substantial net assets, but in fact it is a shell, and all the assets ostensibly owned by the corporation are actually owned by the shareholder. The corporation defaults, and when the lender tries to sue the shareholder to collect his loan--for the corporation has no assets out of which to collect it--he is met by the defense of limited liability. This is the paradigmatic case for rejecting the defense. Illustrative cases under Wisconsin law are Wiebke v. Richardson & Sons, Inc., 83 Wis.2d 359, 362-64, 265 N.W.2d 571, 573 (1978), and Quad/Graphics, Inc. v. Fass, 548 F.Supp. 966, 969 (E.D.Wis.1982), aff'd on other grounds, 724 F.2d 1230 (7th Cir.1983).

The present case is harder. The land was registered in Wise's name, so any creditor who bothered to search the title of the land underlying "Historyland" would have reason to doubt that Telemark owned it, and would...