Predco, Inc. v. First Bank Southeast
| Decision Date | 20 February 1996 |
| Docket Number | No. 95-0011,95-0011 |
| Citation | 200 Wis.2d 491,546 N.W.2d 885 |
| Parties | NOTICE: UNPUBLISHED OPINION. RULE 809.23(3), RULES OF CIVIL PROCEDURE, PROVIDE THAT UNPUBLISHED OPINIONS ARE OF NO PRECEDENTIAL VALUE AND MAY NOT BE CITED EXCEPT IN LIMITED INSTANCES. PREDCO, INCORPORATED, Plaintiff-Appellant, v. FIRST BANK SOUTHEAST, N.A., Defendant-Respondent. PREDCO, INCORPORATED, Plaintiff-Appellant, v. FIRST BANK SOUTHEAST, N.A., and Dean Beck, Defendants-Respondents. |
| Court | Wisconsin Court of Appeals |
Appeal from an order of the circuit court for Milwaukee County: MICHAEL D. GUOLEE, Judge.
Before WEDEMEYER, P.J., FINE and SCHUDSON, JJ.
This appeal results from two intransigent litigants making their respective bad business decisions worse. Predco, Incorporated was called upon to comply with an unconditional guaranty for a business it had divested itself of without obtaining a release of the guaranty. First Bank Southeast, N.A., formerly Kenosha National Bank, agreed to serve as trustee of an industrial bond issue that went sour. Predco relies upon aggressive litigation to pursue its ends. First Bank has exercised self-help attachment of money under its control.
In this particular appeal, Predco appeals from an order granting summary judgment to First Bank and Dean Beck. The order dismissed Predco's claims for return of any surplus funds Predco paid First Bank to satisfy an earlier judgment and for funds recovered by First Bank as expenses in a bankruptcy proceeding. In addition, the order Predco appeals from declared that First Bank had a first lien against funds the bank received on behalf of bondholders from the bankruptcy. The lien is for past and future attorney fees and litigation expenses flowing from the bankrupt's default on the repayment of the bonds. The trial court did not review any of the amounts claimed by First Bank or determine the amount of First Bank's lien.
On appeal, Predco contends that claim preclusion bars First Bank from recovering additional monies from Predco; that the doctrine of subrogation allows Predco to recover a portion of the funds it previously paid First Bank to satisfy a judgment the bank had against Predco; that the doctrines of claim preclusion and subrogation entitle Predco to the funds First Bank received from the bankruptcy; and that the trial court erred when it dismissed Predco's claims against Beck.
We reject Predco's claim that it is entitled to recover either any surplus funds paid on the earlier judgment or the funds First Bank received from the LTV bankruptcy for its own expenses. While we agree that First Bank has a first lien on the funds received on behalf of bondholders, we conclude that the lien is not as extensive as First Bank argues. Further, the trial court must determine the actual amount of the lien. Therefore, we affirm the order in part and reverse in part, and we remand the case to the trial court for further proceedings.
As all the filings in this case recite, this dispute has a lengthy history. In 1978, Wilton, Iowa, issued industrial revenue bonds to finance the construction of a production facility for Precision Steel Company--Iowa, a subsidiary of Predco. First Bank 1 agreed to serve as trustee. Precision Steel was to pay the bonds, and Predco guaranteed Precision Steel's obligations. The respective rights and obligations of the parties were detailed in a loan agreement between Wilton and Precision Steel, an indenture of trust between Wilton and First Bank, and a guaranty agreement between Predco and First Bank.
In 1981, Predco sold Precision Steel to Jones & Laughlin Steel, Inc., a subsidiary of LTV Corporation. In July 1986, LTV and its affiliated companies, including the successor to Precision Steel, filed a Chapter 11 bankruptcy petition. First Bank filed two claims in the LTV bankruptcy, one on behalf of the bondholders and one for its own expenses arising from the default on the bond obligation.
First Bank also demanded that Predco honor its guaranty obligations, which Predco refused to do. First Bank filed suit in federal court to enforce the guaranty in 1988, obtained a judgment in 1989 and a supplemental judgment in 1992 (collectively, "federal judgment"), and ultimately collected the judgments in 1992. The federal judgment was for principle and interest owed to bondholders, attorney fees and costs incurred in the litigation on the guaranty through 1992, and attorney fees and costs incurred in connection with the LTV bankruptcy through 1989. The federal judgment also earned post-judgment interest. In part because the interest rate on the federal judgment exceeded the interest rate on the bonds, First Bank received $207,745.40 more than it paid to bondholders. The amount of $55,805.58 was interest, and the remainder was reimbursement for attorney fees and expenses. In December 1992, Predco filed suit to recover this alleged "surplus judgment" of $55,805.58. 2
After paying the judgment against it, Predco filed a motion in the LTV bankruptcy for transfer of First Bank's claims to Predco. The bankruptcy court denied the request, not because it determined that Predco was not entitled to the claims, but because the dispute did not affect the bankruptcy proceeding itself. The bankruptcy judge held that the dispute would be better resolved in state court.
A plan of reorganization was finally approved in the LTV bankruptcy in 1993. On the claim submitted on behalf of the bondholders, First Bank received $312,526.00 and two classes of securities. Conceding that Predco has an interest in this payment based upon subrogation, First Bank nonetheless claims a first lien against the cash received. The lien secures unreimbursed expenses First Bank has or will incur because of the default on the bonds. First Bank contends that the secured expenses include the litigation expenses incurred in the present case and any related future litigation Predco may file. Although First Bank transferred the securities to Predco, it has refused to transfer any of the cash payment without a full release of all liabilities from Predco.
On its claim for administrative expenses, First Bank submitted a claim of $303,223.82 in the LTV bankruptcy. According to the summary judgment materials, this claim included all expenses actually incurred through April 15, 1993, and additional expenses estimated to June 30, 1993. LTV accepted First Bank's claim, but reduced it by the $207,745.40 First Bank received under the federal judgment that was not paid to bondholders. First Bank received the difference, $95,478.42, in cash.
In August 1993, Predco filed suit to recover the proceeds of the bankruptcy claims from First Bank. In addition, Predco named Dean Beck, a trust officer with First Bank, as a defendant. The suit was consolidated with the litigation for the "surplus judgment," and Predco filed an amended complaint claiming subrogation, breach of contract, conversion, unjust enrichment/constructive trust, and negligence. In its answer, First Bank filed a counterclaim seeking a judgment declaring that it had a continuing first lien on the proceeds from the LTV bankruptcy for fees and expenses it incurred as trustee as a result of the default on the bonds.
The parties filed cross-motions for summary judgment, and the trial court granted the motions of First Bank and Beck. Although First Bank repeatedly described Predco's claims as frivolous, both in briefs filed with the trial court and on appeal, First Bank did not seek a finding that the claims or appeal were frivolous.
Before addressing the specific claims made by Predco, it is necessary to set forth the legal principles that govern the issues raised by Predco's claims against First Bank. Essentially, Predco contends that by subrogation it is entitled to an alleged "surplus judgment." Predco also contends that the principles of merger and claim preclusion, or res judicata, bar First Bank from recovering additional money from Predco. Conversely, First Bank claims that the trust indenture gave it an open-ended right to recover all expenses of collection caused by the default on the bonds, including the expenses of defending against Predco's claims. Therefore, this appeal involves the doctrines of subrogation, merger, and claim preclusion, as well as our standards of review for contract interpretation and summary judgment.
Subrogation is an equitable action that may be applied when a party who is secondarily liable satisfies the debt or obligation of one who bears the primary legal responsibility for the debt or obligation. Cunningham v. Metropolitan Life Ins. Co., 121 Wis.2d 437, 443-44, 360 N.W.2d 33, 36 (1985). When the party with secondary liability pays the obligation, he or she succeeds to the rights, or "steps into the shoes," of the party who was paid. Id. at 444, 360 N.W.2d at 36. The purpose of subrogation is to place the ultimate loss on the party primarily responsible and to avoid unjust enrichment to that party. Id. Subrogation arises by operation of law ("equitable subrogation") or by contract ("conventional subrogation"). Id. at 445, 360 N.W.2d at 37.
The party seeking to prove subrogation has the burden of introducing evidence to establish his or her claim. Id. at 445-46, 360 N.W.2d at 37. As a general rule, payment by a guarantor subrogates the guarantor to the rights of the creditor to whom the guarantor has made payment. Winter v. Trepte, 234 Wis. 193, 198, 290 N.W. 599, 602 (1940). The subrogation right does not enlarge or diminish the creditor's rights, however. Employer's Ins. v. Sheedy, 42 Wis.2d 161, 164-65, 166 N.W.2d 220, 222 (1969) (). Additionally, because of its equitable nature, subrogation is not automatically allowed whenever a possible claim for subrogation exists. First National Bank v. Hansen, 84 Wis.2d 422, 429, 267 N.W.2d 367, 370 (1978)....
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