Park Bank v. Roger E. Westburg

2013 WI 57SUPREME COURT OF WISCONSIN
CASE NO.: 2010AP3158
COMPLETE TITLE: Park Bank,
Plaintiff-Respondent,
v.
Roger E. Westburg and Sandra L. Westburg,
Defendants-Appellants-Petitioners.
REVIEW OF A DECISION BY THE COURT OF APPEALS
340 Wis. 2d 497, 812 N.W.2d 539(Ct. App. 2012 – Unpublished)
OPINION FILED: July 3, 2013
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: January 10, 2013
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Walworth
JUDGE: John R. Race
JUSTICES:
CONCURRED: ROGGENSACK, ZIEGLER, GABLEMAN, JJJ., concur.
(Opinion filed.)
DISSENTED:
NOT PARTICIPATING:
ATTORNEYS:
For the defendants-appellants-petitioners, there were
briefs by Mark Sostarich, Elkhorn, and oral argument by Mr.
Sostarich.
For the plaintiff-respondent, there was a brief by Michael
T. Hopkins, and Hopkins McCarthy LLC, Milwaukee, and oral
argument by Mr. Hopkins.
An amicus curiae brief was filed by John E. Knight and
Kirsten E. Spira, and Boardman and Clark, LLP, Madison, on
behalf of the Wisconsin Bankers Association. Oral argument by
Mr. Knight.
2013 WI 57NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2010AP3158
(L.C. No. 2007CV1028)
STATE OF WISCONSIN : IN SUPREME COURT
Park Bank,
Plaintiff-Respondent,
FILED
v.
JUL 3, 2013
Roger E. Westburg and Sandra L. Westburg,
Diane M. Fremgen
Defendants-Appellants-Petitioners. Clerk of Supreme Court
REVIEW of a decision of the Court of Appeals. Affirmed.
¶1 ANN WALSH BRADLEY, J. The petitioners, Roger E.
Westburg and Sandra L. Westburg (collectively, the Westburgs),
seek review of an unpublished decision of the court of appeals
affirming the circuit court's grant of summary judgment to Park
Bank.1 Park Bank commenced an action against the Westburgs
seeking payment under two guaranty contracts and the Westburgs
alleged several counterclaims and affirmative defenses in
response.
1
Park Bank v. Westburg, No. 2010AP3158, unpublished slip
op. (Ct. App. Feb. 8, 2012), affirming the circuit court for
Walworth County, John R. Race, J., presiding.
No. 2010AP3158
¶2 Park Bank argues that the alleged counterclaims are
derivative of the corporation. Therefore, as guarantors of
payment, the Westburgs have no standing in this action to allege
counterclaims that are derivative. Further, Park Bank asserts
that the Westburgs' affirmative defenses are barred because they
are subject to claim preclusion.
¶3 We conclude that Park Bank is entitled to summary
judgment dismissing all of the Westburgs' counterclaims. With
the exception of their claim of injuries arising from Park
Bank's denial of access to their personal account, each of the
Westburgs' counterclaims is derivative. Because each is
derivative, the Westburgs have no standing to raise them given
that they appear in this action as guarantors. Even if the
Westburgs' remaining claim of injuries arising from Park Bank's
denial of access to their personal account would be determined
to be a direct claim, summary judgment dismissing the claim is
appropriate because their alleged damages do not arise from Park
Bank's denial of access.
¶4 We need not address whether claim preclusion bars the
Westburgs' affirmative defenses because we determine that the
affirmative defenses do not defeat Park Bank's demand under the
guaranties for payment.
¶5 Finally, we conclude that Park Bank has made a prima
facie case for summary judgment on its claims for payment.
Because the Westburgs have failed to raise any genuine issue of
material fact showing that payment is not due or that any debtor
was not the subject of an insolvency proceeding, the circuit
2
No. 2010AP3158
court correctly granted summary judgment to Park Bank.
Accordingly, we affirm the court of appeals.
I
¶6 This case is an action seeking payment under two
"Continuing Guaranty (Unlimited)" contracts (the guaranties)
executed by the Westburgs. In 2005, the Westburgs decided to
start a manufacturing business specializing in the manufacture
of retail fixtures and point-of-purchase advertising displays.
They found a failing woodcraft business located in Walworth,
Wisconsin that had woodworking equipment and other assets
necessary for their new business.
¶7 The Westburgs created two entities to house the
business' operations and assets. Zaddo, Inc. (Zaddo) was
created to run the business operations, while Zaddo Holdings,
LLC (Zaddo Holdings) was created for the purpose of holding
title to real estate.
¶8 In order to fund the purchase of the failing woodcraft
business, the Westburgs sought financing from Park Bank. To
secure the needed financing, the Westburgs executed the two
guaranties that are at issue in this case. One of the
guaranties guaranteed payment of Zaddo Holdings' debts to Park
Bank and the other guaranteed payment of Zaddo's debts to Park
Bank. The guaranties are otherwise identical in the obligations
imposed upon the Westburgs.
¶9 Each of the guaranties provides that the Westburgs
"jointly and severally guarantee[] payment of the Obligations
defined below when due or, to the extent not prohibited by law,
3
No. 2010AP3158
at the time any Debtor becomes the subject of bankruptcy or
other insolvency proceedings." The term "Obligations" under the
guaranties is defined as "all loans . . . and all other debts,
obligations and liabilities of every kind and
description. . . ."
¶10 The guaranties additionally grant to Park Bank "a
security interest and lien in any deposit account" that the
Westburgs might have with Park Bank. Under the guaranties, Park
Bank may "after the occurrence of an event of default" set-off
any unpaid amounts owed "against any deposit balances . . . or
other money now or hereafter owed [the Westburgs] by [Park
Bank]."
¶11 Park Bank took a mortgage on the Westburgs' home in
Illinois as a part of the financing process but subsequently
released the mortgage when the Westburgs sold their home in
2005. Park Bank required the Westburgs to deposit the proceeds
from the sale of the home into an account with Park Bank and it
took a security interest in that account as collateral for the
business loans. The proceeds from the sale of the home were in
excess of $600,000.
¶12 The Westburgs utilized the funds in the account for
several purposes. They withdrew $227,668.12 from the account in
order to pay down a portion of the business' real estate loan,
which they allege caused Park Bank to release its security
interest in the account. The record also indicates that the
Westburgs used the account for their daily living expenses
because they did not, at least as of August 30, 2006, draw a
4
No. 2010AP3158
salary from Zaddo. The account represented the Westburgs' sole
source of funds since all of their other assets had been
invested in Zaddo and Zaddo Holdings.
¶13 In 2006, the business relationship between Park Bank,
Zaddo, Zaddo Holdings, and the Westburgs began to fall apart.
By the spring of 2006, Park Bank argued that Zaddo had defaulted
on its loans. In response, the Westburgs asserted that the
loans were never in monetary default.
¶14 As a result of Zaddo's alleged default, the Westburgs,
as guarantors and on behalf of Zaddo and Zaddo Holdings,
executed a "Forbearance Agreement" with Park Bank that was dated
May 11, 2006. The Westburgs allege that Park Bank pressured
them into signing the forbearance agreement without adequate
time to review it and without an opportunity to have an attorney
review it.
¶15 In the forbearance agreement, the parties agreed that
Zaddo's loans were in default, but Park Bank agreed to forbear
taking any further action on the loans until September 30, 2006.
In return, the parties agreed that Zaddo would meet certain
conditions related to its profitability and to staying current
on its loan obligations. Additionally, Zaddo was required to
furnish certain financial information to Park Bank on a regular
basis and was to comply with its outstanding loan obligations to
Park Bank and other third-party creditors.
¶16 According to Park Bank, Zaddo was unable to meet the
terms of the forbearance agreement. Zaddo's alleged non-
performance prompted a meeting between the Westburgs and Park
5
No. 2010AP3158
Bank on August 30, 2006. At that meeting, Park Bank informed
the Westburgs that it was prepared to petition for a
receivership if Zaddo did not petition for one voluntarily.2 The
Westburgs argued against petitioning for a receivership.
¶17 During a break in the August 30 meeting, Roger
Westburg attempted to withdraw money from the Westburgs'
personal account with Park Bank. He discovered that Park Bank
had put a hold on the account and would not allow him access to
it.
¶18 Roger Westburg returned to the meeting and demanded
access to the personal account. When the Westburgs advanced
that Park Bank had no right to freeze their account, Park Bank
responded that it was entitled to the entire account.
¶19 The Westburgs allege that Park Bank said it would
release the hold on the account only if the Westburgs agreed to
Park Bank's demand that Zaddo enter a receivership. As a
result, the Westburgs agreed that Zaddo would petition for a
receivership under what they described as "extreme duress."
¶20 Shortly after the August 30, 2006 meeting, the
Westburgs executed a "Cooperation Agreement" with Park Bank in
which Park Bank agreed to allow them access to the funds in the
2
Under Chapter 128 of the Wisconsin Statutes, a court may
"sequestrate the property of a debtor and appoint a receiver"
under certain conditions. Wis. Stat. § 128.08(1) (2009-10).
One such condition is when a corporation "has been dissolved or
is insolvent or is in imminent danger of insolvency or has
forfeited its corporate rights." Id. A creditor may petition
for the appointment of a receiver. Id.
6
No. 2010AP3158
personal account. The Cooperation Agreement was executed on
September 6, 2006, restoring the Westburgs' access to the
personal account.
¶21 Zaddo later filed a petition for a receivership and a
receiver was appointed. During the receivership, Zaddo's assets
were liquidated and the receiver made payments to Park Bank.
The Westburgs did not receive a complete breakdown regarding how
Park Bank applied different funds from assets that were
liquidated by the receiver.
¶22 Park Bank then commenced a foreclosure action against
Zaddo Holdings on October 19, 2006. The circuit court granted a
default judgment against Zaddo Holdings, and the foreclosed
property was sold at a sheriff's sale.
¶23 This action against the Westburgs seeking payment
under the guaranties was commenced by Park Bank following the
receivership and foreclosure proceedings. In its complaint,
Park Bank alleged that when the payments from the receiver were
applied, the Westburgs owed Park Bank $681,852.05 plus interest
on the Zaddo guaranty. Additionally, it alleged that the
Westburgs owed Park Bank $698,718.17 plus interest on the Zaddo
Holdings guaranty.
¶24 As grounds for collection under the Zaddo guaranty,
Park Bank alleged that Zaddo was in default on its loans for
failure to make the required payments. Additionally, Park Bank
contended that Zaddo's receivership triggered the Westburgs'
obligations under the Zaddo guaranty. Regarding the Zaddo
Holdings guaranty, Park Bank likewise alleged "payment default"
7
No. 2010AP3158
and that the Zaddo receivership triggered the Westburgs'
obligation to pay.
¶25 In their answer, the Westburgs asserted several
counterclaims against Park Bank. One such counterclaim alleged
a breach of fiduciary duty. In that counterclaim, the Westburgs
maintained that Park Bank had wrongly denied them access to the
funds in their personal account. They also alleged that Park
Bank forced Zaddo into an unnecessary receivership along with
several other breaches of fiduciary duty based upon Park Bank's
conduct toward Zaddo and Zaddo Holdings.
¶26 In a counterclaim for breach of contract, the
Westburgs further alleged that Park Bank breached its duty of
good faith and fair dealing when it froze the Westburgs'
personal account and authorized its release only when the
Westburgs agreed to Park Bank's demands. As with their breach
of fiduciary duty counterclaim, the Westburgs asserted that Park
Bank breached its duty of good faith and fair dealing by forcing
Zaddo into a receivership and taking other allegedly unlawful
actions toward Zaddo in its business dealings. Additionally,
the Westburgs alleged several other counterclaims including a
counterclaim for declaratory judgment and injunctive relief, a
counterclaim of negligence, and a counterclaim that Park Bank
breached a duty to disclose.
¶27 Although the Westburgs' answer did not specify the
damages they sought for each counterclaim, they later filed an
itemized list of damages. They sought damages for the loss of
their personal investment and loans to Zaddo and Zaddo Holdings,
8
No. 2010AP3158
liability resulting from their personal guaranties of Zaddo's
debt to third-party vendors, and for liability stemming from
their personal guaranties of Zaddo's corporate credit cards.
Furthermore, the Westburgs claimed damages based upon
unreimbursed expenses that they incurred on behalf of Zaddo and
Zaddo Holdings on their personal credit cards and liability
stemming from their personal guaranty of sales commissions owed
by Zaddo. Finally, they sought damages for lost wages and
employment benefits from Zaddo and for liability on their
guaranties of other loan obligations under a separate Small
Business Administration loan to Zaddo.
¶28 The Westburgs additionally pled several affirmative
defenses, including an affirmative defense incorporating the
Westburgs' counterclaims; a failure by Park Bank to state a
claim upon which relief can be granted; that Park Bank was
estopped from asserting its claims by its own conduct; that Park
Bank breached its contracts with Zaddo, Zaddo Holdings, and the
Westburgs; that the forbearance agreement is void and
unenforceable having been obtained under duress; that the
doctrine of laches barred Park Bank's claims; that Park Bank's
claims were barred by an insufficient service of process; that
Park Bank failed to mitigate damages; and that Park Bank failed
to properly marshal assets and remedies.
¶29 Park Bank moved for summary judgment, arguing that it
had made a prima facie case with regard to the Westburgs'
obligations under the guaranties and that the Westburgs'
counterclaims and affirmative defenses should be dismissed. The
9
No. 2010AP3158
circuit court denied the motion at a hearing, reasoning that
disputes of material fact precluded the entry of summary
judgment. The circuit court indicated that it would address the
Westburgs' counterclaims and affirmative defenses at a later
date.
¶30 Park Bank later renewed its motion for summary
judgment, arguing that the Westburgs' counterclaims and
affirmative defenses must be dismissed because they are
derivative and the Westburgs lack standing to raise them. The
circuit court held a second hearing to address Park Bank's
motion. For each counterclaim, the circuit court concluded that
the Westburgs alleged an action that belonged to Zaddo.
However, the circuit court did not grant summary judgment on the
Westburgs' counterclaim for injunctive and declaratory relief in
its entirety, but instead dismissed it to the extent that it
purported to claim injunctive or declaratory relief on behalf of
Zaddo. With regard to the remainder of the counterclaims, the
circuit court granted summary judgment.
¶31 Turning to the Westburgs' affirmative defenses, the
circuit court determined that they could "only present defenses
available to themselves." The circuit court proceeded to
analyze each affirmative defense in turn. It granted summary
judgment to Park Bank on the Westburgs' affirmative defenses of
a failure to state a claim, laches, insufficiency of process,
and failure to marshal assets, concluding that the evidence did
not support those defenses.
10
No. 2010AP3158
¶32 As for the remainder of the Westburgs' affirmative
defenses, the circuit court determined that if the Westburgs
could raise defenses that Zaddo could have raised as a matter of
law, then summary judgment would not be warranted. The circuit
court canceled the previously-scheduled trial and ordered
further briefing from the parties for the purpose of determining
whether summary judgment was appropriate on any of the remaining
affirmative defenses.
¶33 After additional briefing and at a third hearing, the
circuit court concluded that claim preclusion prevented the
Westburgs from asserting any defenses which might have been
raised in the Zaddo Holdings foreclosure action. However, with
regard to the remainder of the Westburgs' affirmative defenses,
the circuit court reasoned that the Westburgs could assert
defenses that otherwise could have been raised by Zaddo or Zaddo
Holdings and denied summary judgment.
¶34 Prior to trial, the case was assigned to another judge
due to judicial rotation. The parties again began to dispute
the issues remaining for trial. The circuit court permitted
summary judgment briefing and, in a written decision, granted
summary judgment to Park Bank on all issues. It concluded that
although the "path to this point is convoluted," Park Bank had
made a prima facie case for summary judgment. Additionally, the
circuit court concluded that the affirmative defenses asserted
by the Westburgs did not raise any issue of material fact.
¶35 The Westburgs appealed and the court of appeals
affirmed the circuit court. Stating that all of the Westburgs'
11
No. 2010AP3158
claims "arise out of the alleged injury to Zaddo," the court of
appeals determined that the Westburgs "raise defenses and claims
involving alleged harm and damage to Zaddo and/or Zaddo
Holdings." Therefore, the court of appeals concluded that the
Westburgs' counterclaims and affirmative defenses are derivative
and that they lack standing to raise them in this action.
II
¶36 In this case, we are called upon to review the circuit
court's grant of summary judgment to Park Bank. We review the
grant of summary judgment independently of the determinations
rendered by the circuit court and the court of appeals, but we
apply the same methodology as the circuit court. Green Spring
Farms v. Kersten, 136 Wis. 2d 304, 315-17, 401 N.W.2d 816(1987). Summary judgment is appropriate where there is no
genuine dispute of material fact and the moving party is
entitled to judgment as a matter of law. Wis. Stat. § 802.08(2)
(2009-10).3
¶37 The first issue raised on review is whether the
Westburgs, as guarantors, lack standing to raise their
counterclaims. In addressing this issue, we also must examine
the nature of the counterclaims to determine whether they are
derivative of the corporation. Issues of standing and
determinations of whether a counterclaim is derivative present
questions of law that we review independently of the
3
All subsequent references to the Wisconsin Statutes refer
to the 2009-10 version unless otherwise indicated.
12
No. 2010AP3158
determinations of the circuit court and the court of appeals.
Krier v. Vilione, 2009 WI 45, ¶14, 317 Wis. 2d 288, 766 N.W.2d
517.
¶38 The second issue we address is whether the Westburgs'
affirmative defenses defeat Park Bank's claims for payment under
the guaranties. Whether an affirmative defense defeats a demand
for payment under a guaranty contract requires construction of
the guaranty contract, which presents a question of law that we
review independently of the determinations rendered by the
circuit court and the court of appeals.4 Crown Life Ins. Co. v.
LaBonte, 111 Wis. 2d 26, 32, 330 N.W.2d 201 (1983).
III
¶39 We begin our analysis by addressing the Westburgs'
counterclaims. Park Bank argues that the Westburgs have no
standing to allege counterclaims that are derivative because as
guarantors they may not raise claims that are derivative of the
corporation. It contends that the Westburgs' counterclaims are
derivative in nature.
4
The Westburgs also challenge the court of appeals'
conclusion that claim preclusion bars them from asserting their
affirmative defenses. We do not address their argument, and
thus do not affirm the reasoning of the court of appeals,
because we conclude that the circuit court properly granted
summary judgment to Park Bank on other grounds.
Furthermore, the Westburgs argue that Park Bank cannot rely
on what they argue are unpled allegations in a motion for
summary judgment and in motions in limine. We likewise do not
address that argument.
13
No. 2010AP3158
¶40 In a derivative action, a shareholder "assumes the
mantle of the corporation itself to right wrongs committed by
those temporarily in control" of the corporation. Roger J.
Magnuson, 1 Shareholder Litigation § 9:1 (2012). The purpose of
a shareholder derivative action is "'to prevent injustice to the
corporation by allowing shareholders to enforce corporate
interests, when the directors refuse to take corrective
action.'"5 Ewer v. Lake Arrowhead Ass'n, Inc., 2012 WI App 64,
¶42, 342 Wis. 2d 194, 817 N.W.2d 465 (quoting 13 William Meade
Fletcher, Fletcher Cyclopedia of the Law of Corporations, § 5949
(2004)).6
5
The Westburgs in their briefing refer to themselves as
"shareholders-guarantors," a label that reflects two of their
several roles as business owners. In addition to being the sole
shareholders of Zaddo and the sole members of Zaddo Holdings,
the Westburgs are also the officers in charge of each business
entity. However, as explained in ¶¶45-56, infra, the Westburgs
appear in this action solely as guarantors, not in their
capacities as officers, members, or shareholders.
6
In contrast, a direct action is an action seeking a
judgment awarding damages to the plaintiff individually due to
injuries that the plaintiff individually suffered. Read v.
Read, 205 Wis. 2d 558, 569-70, 556 N.W.2d 768 (Ct. App. 1996).
In a direct action the complaining plaintiff individually
recovers damages. Roger J. Magnuson, 1 Shareholder Litigation,
§ 9:1 (2012).
14
No. 2010AP3158
¶41 In a shareholder derivative action, the claims belong
to the corporation, not to the complaining individual.7 Einhorn
v. Culea, 2000 WI 65, ¶16, 235 Wis. 2d 646, 612 N.W.2d 78.
Generally, a derivative claim is one that "a corporation could
bring because the corporation's assets are affected." Borne v.
Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶15, 266
Wis. 2d 253, 667 N.W.2d 709.
¶42 In Rose v. Schantz, 56 Wis. 2d 222, 201 N.W.2d 593(1972), this court set forth the general framework to evaluate
whether a claim is direct, derivative, or both. Under Rose, the
"[r]ights of action accruing to a corporation belong to the
corporation, and an action at law or in equity, cannot be
maintained" by the complaining individual in a direct action.
Id. at 229 (quoting Marshfield Clinic v. Doege, 269 Wis. 519,
526, 69 N.W.2d 558 (1955)). The focus of the inquiry is
"[w]hose right is sought to be enforced" by the individual's
direct action. Id.
7
Shareholder derivative actions often involve minority
shareholders seeking to remedy alleged mismanagement or
malfeasance by officers or directors of a corporation. See,
e.g., Read, 205 Wis. 2d at 569 (alleging controlling directors
mismanaged a corporation); Notz v. Everett Smith Group, Ltd.,
2009 WI 30, ¶23, 316 Wis. 2d 640, 764 N.W.2d 904 (determining
that a breach of fiduciary duty claim is derivative based on a
lost corporate opportunity). However, shareholder derivative
actions may also arise where officers or directors have not
injured the corporation but instead refuse to adequately advance
the corporation's interests. See Ewer v. Lake Arrowhead Ass'n,
Inc., 2012 WI App 64, ¶42, 342 Wis. 2d 194, 817 N.W.2d 465(quoting 13 William Meade Fletcher, Fletcher Cyclopedia of the
Law of Corporations, § 5949 (2004)).
15
No. 2010AP3158
¶43 The Rose court determined that where the injury to the
corporation is the primary injury and any injury to a
shareholder is secondary, the shareholder may not bring a direct
action, and is instead limited to commencing a derivative
action:
That such primary and direct injury to a corporation
may have a subsequent impact on the value of the
stockholders' shares is clear, but that is not enough
to create a right to bring a direct, rather than
derivative, action. Where the injury to the
corporation is the primary injury, and any injury to
stockholders secondary, it is the derivative action
alone that can be brought and maintained. That is the
general rule, and, if it were to be abandoned, there
would be no reason left for the concept of derivative
actions for the redress of wrongs to a corporation.
Id. at 229-30. Thus, where an individual's injury results
from the corporation's injury, the resulting claim is derivative
and the individual lacks standing to raise it in a direct
action. See also Notz v. Everett Smith Group, Ltd., 2009 WI 30,
¶20, 316 Wis. 2d 640, 764 N.W.2d 904.
¶44 Although the Rose court did not address whether the
same course of conduct may give rise to both direct and
derivative claims, it is well established that where the injury
and damages are independent, both a direct action and a
shareholder derivative action may be commenced. An individual
"may sue to redress direct injuries to him or herself regardless
of whether the same violation injured the corporation." 12B
William Meade Fletcher, Fletcher Cyclopedia of the Law of
Corporations, § 5911 (perm.ed., rev.vol.2009). Case law further
indicates that in a direct action the individual may not claim
16
No. 2010AP3158
damages sustained by the corporation or damages that the
corporation could have sought in its own capacity. Buschmann v.
Professional Men's Ass'n, 405 F.2d 659, 663 (7th Cir. 1969)
(concluding that a direct claim existed where the plaintiff
sought damages "which he sustained individually" that were not
sustained by the corporation and could not have been asserted by
the corporation in its own right).
¶45 However, examining the differences between direct
claims, derivative claims, or claims that are both direct and
derivative does not fully resolve our inquiry into whether the
Westburgs as guarantors have standing to raise derivative
counterclaims. Whether a guarantor may raise derivative claims
individually in an action seeking payment under a guaranty is a
question not previously addressed by Wisconsin courts. The
court of appeals analogized the present case to Mid-State
Fertilizer Co. v. Exchange Nat'l Bank of Chicago, 877 F.2d 1333(7th Cir. 1989). It found Mid-State's rationale persuasive, and
we likewise agree that it is persuasive.
¶46 In Mid-State, a bank loaned money to a corporation and
also obtained guaranties from the corporation's sole
shareholders, Lasley and Maxine Kimmel. Id. at 1334. The
corporation proceeded to lose money. Id. When the bank stopped
making additional advances to the corporation, the corporation
was unable to secure additional financing and was liquidated in
bankruptcy. Id. The corporation and the Kimmels commenced an
action against the bank, alleging several claims which included
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No. 2010AP3158
violations of federal banking laws and violations of the
Racketeer Influenced and Corrupt Organizations Act (RICO). Id.
¶47 The Mid-State court recognized that there are "good
reasons . . . for the enduring distinction between direct and
derivative injury," even when applied to guarantors. Id. at
1335. To avoid "double counting," courts must either attempt to
apportion the recovery according to who bears the effects, or
insist that the corporation recover and allow creditors,
shareholders, officers, and all others involved in the corporate
venture to "share any recovery according to the same rules that
govern all receipts." Id. at 1336. Divvying up the recovery
"would be a nightmare," and is an unnecessary task when
"recovery by the firm handles everything automatically." Id.
Additionally, requiring shareholder derivative actions prevents
"efforts to divert the debtor's assets-to pay off one set of
creditors . . . while keeping the proceeds out of the hands of
the firm's other creditors." Id.
¶48 Rejecting the premise that guarantors are any
different from "shareholders, creditors, managers, lessors,
suppliers, and the like," the Mid-State court determined that
guarantors "cannot recover on account of injury done [to] the
corporation." Id. It would be "extreme" to allow "anyone who
has dealt with a bank as guarantor [to] recover for derivative
injuries." Id. Only where a guarantor suffers direct injury,
which the Mid-State court emphasized is an "injury independent
of the firm's fate," may the guarantor pursue direct remedies.
Id. at 1336-37.
18
No. 2010AP3158
¶49 In Labovitz v. Washington Times Corp., 172 F.3d 897(D.C. Cir. 1999), the Court of Appeals for the District of
Columbia Circuit agreed that Mid-State presented persuasive
authority for determining whether guarantors have standing to
raise derivative claims. In that case, two guarantors of a
corporation alleged several claims, which included a claim that
the Washington Times Corporation failed to fully fund the
corporation as it had promised.8 Id. at 901-02. The failure to
fund the corporation allegedly triggered the guarantors'
obligations. Id. at 901-02. Agreeing with the Mid-State
court's conclusion that guarantors may not advance derivative
claims, the Labovitz court determined that the failure to fully
fund the corporation was derivative. Id. at 903.
¶50 Both Mid-State and Labovitz recognize that guarantors
are treated no differently from creditors in determining whether
the guarantor may bring a derivative action. 877 F.2d at 1336;
172 F.3d at 898. Therefore, their conclusions accord with the
general principle that "creditors may not maintain a derivative
8
The guarantors in Labovitz were also shareholders,
directors, and officers of the corporation that they guaranteed.
Labovitz v. Washington Times Corp., 172 F.3d 897, 898 (D.C. Cir.
1999).
19
No. 2010AP3158
proceeding."9 13 William Meade Fletcher, Fletcher Cyclopedia of
the Law of Corporations, § 5972.20 (2004).
¶51 Accordingly, we conclude that a guarantor lacks
standing to raise derivative claims. Having arrived at that
9
The concurrence states that "our decisions...specifically
provide that only a shareholder or beneficial owner has standing
to bring a derivative claim." Concurring op., ¶83. In support
of that premise, the concurrence focuses on Krier v. Vilione,
2009 WI 45, ¶29, 317 Wis. 2d 288, 766 N.W.2d 517 and also
references Borne v. Gonstead Advanced Techniques, Inc., 2003 WI
App 135, 266 Wis. 2d 253, 667 N.W.2d 709 and Shelstad v. Cook,
77 Wis. 2d 547, 253 N.W.2d 517 (1977). Not one of those cases
involved a guarantor.
The concurrence is alone in its interpretation. No one in
this case, not the circuit court, the court of appeals, the
amicus (the Wisconsin Bankers Association) or even the parties,
advances the concurrence's interpretation of those cases.
Likewise, neither the Wisconsin Bankers Association, the
circuit court, the court of appeals, nor Park Bank shares the
concurrence's interpretation of Mid-State Fertilizer Co. v.
Exchange Nat'l Bank of Chicago, 877 F.2d 1333 (7th Cir. 1989).
Park Bank, unpublished slip op.
The concurrence asserts that Mid-State "has nothing to do
with whether a guarantor has standing to bring a derivative
claim" in Wisconsin. Concurring op., ¶88. In stark contrast to
the concurrence's interpretation of Mid-State, the Wisconsin
Bankers Association advances that the reasoning of Mid-State
establishes that in this case, "[t]he guarantors lack standing
to raise [derivative] claims and defenses against the
bank . . . ."
Likewise, the circuit court and the court of appeals
disagree with the concurrence's interpretation of Mid-State.
Both courts relied on Mid-State in arriving at their conclusions
that guarantors lack standing to bring a derivative claim.
Finally, Park Bank extensively quoted Mid-State in its brief,
arguing that it requires this court to conclude that "the
Westburgs [lack] standing to pursue [their] derivative claims."
20
No. 2010AP3158
conclusion, we turn next to evaluate whether the counterclaims
alleged by the Westburgs as guarantors are derivative.
¶52 With the exception of their claim that Park Bank
unlawfully denied them access to their personal account, each of
the Westburgs' counterclaims is derivative. The Westburgs'
alleged injuries are secondary to those of Zaddo, arising as a
result of Park Bank's conduct toward Zaddo before, during, and
after Zaddo entered receivership. Zaddo was primarily injured
by allegedly being forced into receivership and any alleged
resulting injury to the Westburgs occurred as a result of
Zaddo's alleged injury. Under Rose and subsequent case law,
those counterclaims are considered derivative. 56 Wis. 2d at
229.
¶53 Furthermore, there is no indication that those
counterclaims are both direct and derivative. The Westburgs'
injuries, with the exception of Park Bank denying them access to
their personal account, arise as a result of Zaddo's injuries,
not independently of Zaddo's injuries. Therefore, the Westburgs
do not have standing in the context of this action to assert
their derivative counterclaims.
¶54 The sole counterclaim alleged by the Westburgs that is
arguably direct is the claim that Park Bank unlawfully denied
the Westburgs access to their personal account. However, even
if Park Bank unlawfully had denied access to the personal
account, Park Bank is still entitled to summary judgment on that
counterclaim because the Westburgs claim damages based upon
their investment losses to Zaddo and not based upon Park Bank's
21
No. 2010AP3158
denial of access to their personal account.10 Each and every
category of damages claimed by the Westburgs arises from their
losses as guarantors, investors, and officers of Zaddo.11
¶55 The Westburgs were ultimately denied access to their
personal account for approximately seven or eight days, from the
August 30, 2006 meeting through when the Cooperation Agreement
was executed on September 6, 2006. Any damages alleged must
arise from a lack of access to the account during that time
period. Like the court of appeals, we conclude that none of the
alleged damages has any connection with Park Bank denying the
10
The guaranties grant to Park Bank "a security interest
and lien in any deposit account" that the Westburgs may have
with Park Bank. Under the guaranties, Park Bank may "after the
occurrence of an event of default" set-off any unpaid amounts
owed "against any deposit balances...or other money now or
hereafter owed [the Westburgs] by [Park Bank]." Furthermore,
the guaranties in this case provide that the Westburgs have
waived "all...legal and equitable surety defenses."
Although we need not examine the exact scope of the
security interest granted to Park Bank by the guaranties or the
Westburgs' waiver of all legal and equitable surety defenses, we
observe that those provisions of the guaranties further
strengthen our conclusion that they may not raise their
counterclaims in this action.
11
The Westburgs claim as damages losses on personal
investments to Zaddo, losses resulting from personal guaranties
of Zaddo's debt to third-party vendors, losses resulting from
Zaddo corporate credit card debts, losses from personally
guaranteed sales commissions owed by Zaddo, losses resulting
from Zaddo's failure to reimburse their personal credit cards,
liability on Small Business Administration loan guaranties of
Zaddo, and lost wages and benefits from Zaddo.
22
No. 2010AP3158
Westburgs access to a personal account from August 30, 2006
until September 6, 2006.12
¶56 The Westburgs in other circumstances may have raised
derivative claims as shareholders. See Wis. Stat. § 180.0741.
However, in order to commence or maintain a shareholder
derivative action, they must comply with certain statutory
requirements. See Wis. Stat. § 180.0741 (allowing a
"shareholder or beneficial owner" to commence or maintain a
shareholder derivative action if the "shareholder or beneficial
owner" meets certain conditions); see also Wis. Stat. § 180.0742
(setting forth additional limitations for when a shareholder
derivative action may be commenced); Wis. Stat. § 180.0744
(requiring a court to dismiss a derivative proceeding under
certain circumstances). No argument is advanced by the parties
that the statutory prerequisites for a derivative action were
met in this case. Therefore, we conclude that summary judgment
dismissing all of the Westburgs' counterclaims is appropriate.
IV
¶57 Having addressed the Westburgs' counterclaims, we
address next the Westburgs' affirmative defenses. Although the
12
In addressing Park Bank's denial of access to the
personal account, the court of appeals concluded as follows:
While the Westburgs may have suffered individual
duress when Park Bank denied them access to their
personal money market accounts, the Westburgs do not
allege any resulting monetary injury because the bank
did eventually return the funds.
Park Bank, unpublished slip op., ¶17 n.11.
23
No. 2010AP3158
parties primarily address the affirmative defenses in their
arguments for and against the application of claim preclusion in
this case, we do not reach their claim preclusion arguments.
Instead, we examine the Westburgs' affirmative defenses to
determine whether they defeat Park Bank's demand for payment
under the guaranties.
¶58 The guaranties in this case are guaranties of payment.
The guaranties provide that payment is required "when due or, to
the extent not prohibited by law, at the time any Debtor becomes
the subject of bankruptcy or other insolvency proceedings."
¶59 Guaranties of payment are different from other
guaranties such as guaranties of collection. A guaranty of
payment binds the guarantor to pay the debt according to the
terms and conditions of the guaranty. Jack Levin, 38 Am. Jur.
2d Guaranty § 16 (2012). In contrast, a guaranty of collection
is a promise that if the principal creditor cannot collect the
claim with due diligence, generally following suit against the
principal debtor, the guarantor will pay the creditor. Id.
¶60 Unlike a guaranty of collection, a guaranty of payment
does not condition liability upon the creditor exhausting
remedies against the debtor. Id. A creditor is under no
obligation to first seek collection from the principal debtor or
any other guarantor under a guaranty of payment. Bank of Sun
Prairie v. Opstein, 86 Wis. 2d 669, 677, 273 N.W.2d 279 (1979)
(quoting First Wis. Nat'l Bank of Oshkosh v. Kramer, 74 Wis. 2d
207, 211-12, 246 N.W.2d 536 (1976)). The law similarly imposes
no duty upon the creditor to notify the guarantor of nonpayment
24
No. 2010AP3158
of the note by the principal debtor. Farmers State Bank v.
Hansen, 174 Wis. 100, 103, 182 N.W.2d 944 (1921).
¶61 This court has recognized that affirmative defenses to
a guaranty may be limited in scope depending on specific
obligations imposed by the guaranty. In Continental Bank &
Trust v. Akwa, 58 Wis. 2d 376, 206 N.W.2d 174 (1973), this court
acknowledged that some affirmative defenses must be raised in a
proceeding seeking payment of the underlying debts rather than
by a guarantor in a proceeding seeking payment under the
guaranty. In response to an affirmative defense that a bank was
not the holder of the underlying debts in an action upon a
guaranty under the Uniform Commercial Code, this court stated:
While the affirmative defenses, as asserted by the
defendants, concerning the possession, transfer and
cancellation of the notes, may be fatal to plaintiff's
cause of action, if he were proceeding upon the
instruments, they are not necessarily fatal to
plaintiff's cause of action upon its separate and
independent contract of guaranty with the defendants.
Id. at 387. Instead, this court emphasized that satisfaction in
full of the underlying indebtedness generally constitutes a
defense in an action upon a guaranty. Id. at 389-90. A
creditor is entitled to "but one performance, and if he receives
that, by payment or other satisfaction, the [guaranty] is
discharged." Id. at 389. Alternatively, release of the
principal debtor from the underlying debt is normally also a
defense in a guaranty action because "release of the principal
also releases the [guarantor]." Id. at 390.
25
No. 2010AP3158
¶62 However, the Akwa court identified two exceptions to
the defense of releasing the principal debtor: "[w]here the
creditor releases a principal [debtor], the [guarantor] is
discharged unless the creditor in the release reserves his
rights against the [guarantor] or the [guarantor] consents to
remain liable notwithstanding the release." Id. at 392.
Accordingly, the defenses available to a guarantor are grounded
in the specific terms and conditions of the guaranty contract.
Id. at 387-90; see also Crown Life Ins. Co. v. LaBonte, 111
Wis. 2d 26, 43, 330 N.W.2d 201 (1983); Lakeshore Commercial
Finance Corp. v. Drobac, 107 Wis. 2d 445, 454, 319 N.W.2d 839(1982).13
¶63 The Westburgs must therefore assert affirmative
defenses that defeat Park Bank's demands for payment under the
guaranties in this case. In order to demand payment under the
guaranties, Park Bank need show only that payment is due or that
any debtor has become the subject of a bankruptcy or insolvency
proceeding. Accordingly, the Westburgs' defenses must logically
13
Additional or differing defenses to a guaranty may exist
depending on the specific terms and conditions of the guaranty
contract. As the Restatement (Third) of Suretyship and Guaranty
notes, there is probably no area of guaranty law in which there
is less consensus than the law of guaranty defenses. Rules
"vary from jurisdiction to jurisdiction, from context to
context, and from common law to the Uniform Commercial Code."
Restatement (Third) of Suretyship and Guarantee, Ch. 3, Topic 3,
Title B, Introductory Note (1995).
26
No. 2010AP3158
address whether payment is due or whether a debtor has become
the subject of a bankruptcy or insolvency proceeding.14
¶64 In pleading their affirmative defenses, the Westburgs
do not assert that payment is not due or that Zaddo was not the
subject of a bankruptcy or insolvency proceeding. Rather, they
assert defenses that address whether Zaddo and Zaddo Holdings
are in default on their debts. Park Bank need not re-litigate
the previous proceedings in order to demand payment under the
guaranties. Instead, it must show only that payment is due or
that a debtor was the subject of a bankruptcy or insolvency
proceeding.
¶65 An examination of the summary judgment record shows
that Park Bank has made the required showing. The Westburgs do
not challenge that Zaddo became the subject of an insolvency
proceeding when it petitioned for a receivership. Park Bank has
additionally set forth in its summary judgment materials the
amounts due and payable both from Zaddo and Zaddo Holdings that
result from Zaddo entering the insolvency proceeding.
¶66 Therefore, we conclude that the Westburgs' affirmative
defenses do not defeat Park Bank's prima facie case for summary
14
The Westburgs' affirmative defenses appear to confuse
their responsibilities under the guaranties with Zaddo's
defenses to an allegation that it has defaulted upon its debts.
The liability of a guarantor arises not from a debt incurred by
a debtor, but rather from a separate guaranty contract. Bank
Mut. v. S.J. Boyer Const., Inc., 2010 WI 74, ¶53, 326 Wis. 2d
521, 785 N.W.2d 462. A guarantor's liability is "separate and
distinct" from the liability of the principal debtor. Id. at
54.
27
No. 2010AP3158
judgment. Because the Westburgs have failed to raise any
genuine issue of material fact showing that payment is not due
or that Zaddo was not the subject of an insolvency proceeding,
the circuit court correctly granted summary judgment to Park
Bank.
V
¶67 In sum, we conclude that Park Bank is entitled to
summary judgment dismissing all of the Westburgs' counterclaims.
With the exception of their claim of injuries arising from Park
Bank's denial of access to their personal account, each of the
Westburgs' counterclaims is derivative. Because the
counterclaims are derivative, the Westburgs have no standing to
raise them given that they appear in this action as guarantors.
Even if the Westburgs' remaining claim of injuries arising from
Park Bank's denial of access to their personal account would be
determined to be a direct claim, summary judgment dismissing the
claim is appropriate because their alleged damages do not arise
from Park Bank's denial of access.
¶68 We need not address whether claim preclusion bars the
Westburgs' affirmative defenses because we determine that the
affirmative defenses do not defeat Park Bank's demand under the
guaranties for payment.
¶69 Finally, we conclude that Park Bank has made a prima
facie case for summary judgment. Because the Westburgs have
failed to raise any genuine issue of material fact showing that
payment is not due or that any debtor was not the subject of an
insolvency proceeding, the circuit court correctly granted
28
No. 2010AP3158
summary judgment to Park Bank on its claims for payment.
Accordingly, we affirm the court of appeals.
By the Court.—The decision of the court of appeals is
affirmed.
29
No. 2010AP3158.pdr
¶70 PATIENCE DRAKE ROGGENSACK, J. (concurring). I write
separately to point out two fundamental principles: (1) the
rights and obligations of guarantors are established by the
guaranty contract, under which the guarantor and the creditor
for whose benefit the guaranty was given operate; and (2) the
majority opinion affirms that only a shareholder or beneficial
owner has standing to bring a derivative claim under Wisconsin
corporate law.1
¶71 I agree with the majority opinion that all
counterclaims and affirmative defenses raised herein, except
one, are derivative and therefore, they cannot be brought in
this action. However, because in some of its discussion, the
majority opinion could be read erroneously to equate
shareholders' rights and obligations with those of guarantors, I
do not join the majority opinion, but respectfully concur.
I. BACKGROUND
¶72 Park Bank's claims in this action against Roger
Westburg and Sandra Westburg (hereinafter, the Westburgs) are
based on the continuing guaranties the Westburgs signed on
January 28, 2005, for the business loans that Park Bank made to
Zaddo, Inc. and Zaddo Holdings.2 The terms of the two guaranties
are identical, with the exception of the named debtors.
1
Majority op., ¶¶3, 67.
2
Litigation arising from these business loans has occurred
in a Wis. Stat. ch. 128 receivership, in which the assets of
Zaddo, Inc. were liquidated, and a foreclosure action, in which
the assets of Zaddo Holdings were sold.
1
No. 2010AP3158.pdr
¶73 The Westburgs defend against Park Bank's enforcement
of the guaranties by affirmative defenses and counterclaims.
With one exception, the affirmative defenses and counterclaims
alleged are derivative of underlying injuries to a corporation,
which only the corporation or a person who has statutory
standing may raise.3 See Rose v. Schantz, 56 Wis. 2d 222, 229,
201 N.W.2d 593 (1972). Although the Westburgs are shareholders
who may have had standing to bring derivative claims, they did
not follow the statutory requirements to do so; therefore, they
cannot raise them in this lawsuit.4 See Read v. Read, 205
Wis. 2d 558, 565, 556 N.W.2d 768 (Ct. App. 1996) (explaining
that in order to have standing to bring a derivative claim, a
litigant must meet the test set out in Wis. Stat. § 180.0741).
¶74 The one claim for which the Westburgs allege direct
injury to them is Park Bank's freezing their personal money-
3
Wisconsin Stat. § 180.0741 provides that a "shareholder or
beneficial owner" may have standing to bring derivative claims
of damage to a corporation, and then only if the shareholder or
beneficial owner meets certain statutory requirements.
Wisconsin Stat. § 180.0740(1) defines "beneficial owner" as "a
person whose shares are held in a voting trust or held by a
nominee on the person's behalf."
4
Wisconsin Stat. § 180.0741 through Wis. Stat. § 180.0744
set out requirements that must be met in order to bring a
derivative claim. See Read v. Read, 205 Wis. 2d 558, 565, 556
N.W.2d 768 (Ct. App. 1996). The Westburgs did not meet those
statutory requirements and therefore, they cannot raise
counterclaims or affirmative defenses that rest on injury to the
corporations.
2
No. 2010AP3158.pdr
market account on August 30, 2006.5 That claim is based on the
Westburgs' assertion that the funds in their personal money-
market account were not subject to any security or credit
agreement.6 They allege that freezing that account damaged them
because it was their sole source of funds for living expenses,
as they were not drawing a salary from Zaddo. The Westburgs
alleged that access to their personal account was denied until
they agreed to place Zaddo, Inc. into a ch. 128 receivership.
On September 7, 2006, the Westburgs placed Zaddo, Inc. into
receivership.
II. DISCUSSION
A. Standard of Review
¶75 Whether the facts alleged in a complaint state a claim
for relief that is based on an injury that is primarily to a
corporation or whether the claimed injury is primarily a direct
injury to another person are questions of law that we review
independently. Borne v. Gonstead Advanced Techniques, Inc.,
2003 WI App 135, ¶10, 266 Wis. 2d 253, 677 N.W.2d 709. The
scope of a guarantor's liability under a written guaranty
contract presents a question of law also subject to our
5
The Westburgs allege that their money-market account was
frozen "prior to" August 15, 2006. See Counterclaims, ¶34.
Park Bank denies this allegation, but admits that it did freeze
the account on August 30, 2006. See Reply to Counterclaims,
¶¶34, 38. I have chosen to use the August 30 date because there
is agreement that the Westburgs were denied access to their
money-market account on August 30, 2006.
6
Counterclaim, ¶48.a.
3
No. 2010AP3158.pdr
independent review. See Cont'l Bank & Trust Co. v. Akwa, 58
Wis. 2d 376, 388, 206 N.W.2d 174 (1973).
B. The Westburgs' Claims
¶76 When an act that is alleged to have caused injury to a
corporation is alleged also to have caused an injury to another
person, we must determine whether the alleged injury to the
other person is direct or merely derivative of the injury to the
corporation. Rose, 56 Wis. 2d at 229. "Where the injury to the
corporation is the primary injury, and any injury to
stockholders secondary, it is the derivative action alone that
can be brought and maintained." Id. Stated otherwise, to raise
a direct claim of injury, the right sought to be enforced must
be that of the person seeking to enforce it and not dependent on
a right of a corporation. Id.
¶77 There are occasions where the separate right of a
corporation and the separate right of another person are both
wrongfully affected by one act. See Harpole Architects, P.C. v.
Barlow, 668 F. Supp. 2d 68, 77-78 (D.C. 2009) (explaining that
where conversion by former bookkeeper was an injury to the
corporation, bookkeeper's misrepresentation, which was made to
hide the conversion of corporate funds, caused a separate injury
to Harpole). Claims raised as affirmative defenses are subject
to the same analysis of whether the defense belongs primarily to
the corporation or is based on a separate and distinct right of
the person who is asserting it.
¶78 In the case at hand, I agree with the majority opinion
that the only right to which injury is claimed that does not
4
No. 2010AP3158.pdr
depend on an underlying injury to a corporation is the temporary
freezing of the Westburgs' personal money-market account by Park
Bank.7
C. Guaranty Principles
¶79 The rights and obligations of a guarantor are separate
and distinct from those of the debtor, as the guarantor's
obligations arise from the terms of the guaranty contract. Bank
Mut. v. S.J. Boyer Constr., Inc., 2010 WI 74, ¶54, 326 Wis. 2d
521, 785 N.W.2d 462 (explaining that a guarantor's rights and
obligations are set by contract). One may guarantee the debts
of an individual, as well as the debts of a corporation. The
legal principles that apply to a guarantor's rights and
obligations are based on the terms of the guaranty contract, not
on the nature of the debtor. See McFarland State Bank v.
Sherry, 2011 WI App 4, ¶1, 338 Wis. 2d 462, 809 N.W.2d 58.
¶80 Under the facts of this case, the Westburgs'
obligations under the guaranty contract do not involve
consideration of their status as shareholders.8 Rather, in this
action, it is the terms of the guaranty contract upon which the
validity of Park Bank's actions and the Westburgs' counterclaims
depend. Bank Mut., 326 Wis. 2d 521, ¶54.
7
Majority op., ¶¶54-55.
8
The significant legal question that escapes review under
the facts of this case is: whether the Westburgs could have
relied on a judgment from a successful derivative claim as a
defense to Park Bank's claims under the guaranty contracts.
Because the Westburgs did not follow the statutory requirements
for bringing a derivative claim, we cannot address this
question.
5
No. 2010AP3158.pdr
¶81 The guaranty the Westburgs signed is a guaranty of
payment.9 Under a guaranty of payment, when the debtor is in
default, the creditor is entitled to enforce collection from the
guarantor without first seeking collection from other sources.
Bank of Sun Prairie v. Opstein, 86 Wis. 2d 669, 677-78, 273
N.W.2d 279 (1979). Stated otherwise, a guaranty of payment is a
primary, not a collateral, promise to pay when the debtor
defaults. Id. at 678. No efforts to collect on other security
are necessary before a creditor may enforce a guaranty of
payment against a guarantor. First Wis. Nat'l Bank of Oshkosh
v. Kramer, 74 Wis. 2d 207, 212, 246 N.W.2d 536 (1976).
¶82 However, a creditor is not permitted to recover from a
guarantor for more than the total debt due. Cont'l Bank, 58
Wis. 2d at 389. Therefore, a guarantor of payment is entitled
to an offset from the debt owed by the debtor for the amount
that the creditor has obtained from other sources. See
McFarland State Bank, 338 Wis. 2d 462, ¶31.
¶83 The majority opinion imprecisely states the law when
it combines principles for determining who may bring a
derivative claim with the rights and obligations of a guarantor.
For example, it posits that "Whether a guarantor may raise
derivative claims individually in an action seeking payment
under a guaranty is a question not previously addressed by
Wisconsin courts."10 However, our decisions, as well as
9
The majority opinion also concludes that the guaranty the
Westburgs signed is a guaranty of payment. Majority op., ¶58.
10
Majority op., ¶45.
6
No. 2010AP3158.pdr
Wisconsin Statutes, specifically provide that only a shareholder
or a beneficial owner has standing to bring a derivative claim.
Krier v. Vilione, 2009 WI 45, ¶29, 317 Wis. 2d 288, 766 N.W.2d
517 (explaining that Krier could not sue on behalf of EOG
Environmental because Krier was not a shareholder and therefore,
"lacks standing" to bring a derivative suit); Borne, 266 Wis. 2d
253, ¶15 (stating that "[t]he failure to plead that one was a
registered shareholder requires the dismissal of derivative
claims"); Shelstad v. Cook, 77 Wis. 2d 547, 554, 253 N.W.2d 517(1977) (explaining that "[p]laintiff's special relation to the
corporation as a stockholder is intrinsic to the very nature of
the [derivative claim] and thus a prerequisite to plaintiff's
standing to pursue it"); see also Wis. Stat. § 180.0741.
¶84 Furthermore, when one is either a shareholder or a
beneficial owner, a derivative claim may be brought only when
the specific requirements set out in the statutes have been met.
Read, 205 Wis. 2d at 565; see also Wis. Stat. §§ 180.0741-.0744
(setting out those requirements). Stated otherwise, unless a
person or entity has the status of shareholder or beneficial
owner, Wisconsin case law and statutes preclude standing to
bring derivative claims. Krier, 317 Wis. 2d 288, ¶¶18, 29;
Borne, 266 Wis. 2d 253, ¶15; Read, 205 Wis. 2d at 565;
Shelstad, 77 Wis. 2d at 554; § 180.0741.
¶85 The majority opinion's use of Mid-State Fertilizer Co.
v. Exch. Nat'l Bank of Chi. (Mid-State II), 877 F.2d 1333 (7th
Cir. 1989), is interesting and merits comment for a number of
reasons. First, in Mid-State II, the corporation that was
7
No. 2010AP3158.pdr
alleged to have suffered injury from Exchange National Bank's
actions was a plaintiff and therefore, it proceeded on seven
counts alleging injury to itself. Mid-State Fertilizer Co. v.
Exch. Nat'l Bank of Chi. (Mid-State I), 693 F. Supp. 666, 669
(N.D. Ill. 1988). Second, the non-corporate plaintiffs, Lasley
and Maxine Kimmel, sued as both shareholders and as guarantors.
Id. at 668. Third, the standing question in Mid-State II turned
on federal statutes that comprise the Bank Holding Company Act
(BHCA) and the Racketeer Influenced Corrupt Organizations Act
(RICO), which accorded standing to "[a]ny person who is injured
in his business or property by reason of anything forbidden
[under the acts]." Mid-State II, 877 F.2d at 1334-35 (citing 12
U.S.C § 1975 and 18 U.S.C § 1964(c)).11
¶86 Only direct injuries are sufficient to afford standing
to sue under BHCA or RICO. Id. at 1335. Accordingly, the
Kimmels were required to show a direct injury; a derivative
injury was insufficient to establish federal standing to bring a
claim under either BHCA or RICO. Id.
¶87 Therefore, the question presented in Mid-State II was
not whether a guarantor could bring a derivative claim. Rather,
the question presented in Mid-State II was whether the Kimmels
had pled a direct or a derivative injury. Id. at 1335. The
11
The plaintiffs' principal grievances were controlled by
Illinois law. Mid-State Fertilizer Co. v. Exch. Nat'l Bank of
Chi. (Mid-State II), 877 F.2d 1333, 1334 (7th Cir. 1989). The
court addressed the standing question to determine whether there
was federal jurisdiction for the pendent state law claims. Id.
at 1334-35.
8
No. 2010AP3158.pdr
court reasoned that shareholders' and guarantors' injuries were
derivative because "[s]uits by shareholders, guarantors, and the
like may well be efforts to divert the debtor's assets——to pay
off one set of creditors (here, the Kimmels) while keeping the
proceeds out of the hands of the firm's other creditors." Id.
at 1336. Accordingly, because the court concluded that the
Kimmels pled only derivative injury, they did not have standing
to proceed on their federal claims. Id.
¶88 The reasoning in Mid-State II supports a guarantor's
standing to proceed on a federal claim under BHCA or RICO if the
guarantor can show a direct, rather than a derivative injury.
Id. at 1336 ("Guarantors must be treated as creditors. When
they suffer direct injury——injury independent of the firm's
fate——they may pursue their own remedies"). Likewise in
Wisconsin, if a guarantor has a direct injury, the guarantor
owns the claim and may proceed on it.12 However, Mid-State II
has nothing to do with whether a guarantor has standing to bring
a derivative claim grounded in Wisconsin law.
¶89 Wisconsin Statutes limit standing to bring derivative
claims to shareholders and beneficial owners. Krier, 317
Wis. 2d 288, ¶29 (explaining that standing to sue based on a
corporate injury requires one to be a shareholder); Borne, 266
Wis. 2d 253, ¶15 (same); Shelstad, 77 Wis. 2d at 554 (same); see
also Wis. Stat. § 180.0741. A guarantor cannot bring a
derivative claim under Wisconsin law if his sole status is that
12
The Westburgs raise a direct claim against Park Bank in
regard to freezing their personal money-market account.
9
No. 2010AP3158.pdr
of a guarantor. Krier, 317 Wis. 2d 288, ¶¶18, 29; Borne, 266
Wis. 2d 253, ¶15; Read, 205 Wis. 2d at 565; Shelstad, 77 Wis. 2d
at 554; see also Wis. Stat. §§ 180.0741-.0744.
¶90 In Wisconsin, a guarantor's rights and obligations are
controlled by the guaranty contract. See Bank Mut., 326 Wis. 2d
521, ¶54. On the other hand, a shareholder's rights are
established by the articles of incorporation, the corporate by-
laws and the Wisconsin Statutes. A guarantor cannot bring a
derivative claim, unless the guarantor is also a shareholder or
a beneficial owner. However, it is the status as a shareholder
or beneficial owner that is necessary to bringing a derivative
claim; being a guarantor is never a sufficient status to bring a
derivative claim.
¶91 The majority opinion cites Labovitz v. Washington
Times Corp., 172 F.3d 897 (D.C. Cir. 1999), as supporting its
contention that "Mid-State presented persuasive authority for
determining whether guarantors have standing to raise derivative
claims."13 Standing alone, the above quotation from the majority
opinion could cause confusion because it could be read to imply
that there are occasions when having the status of a guarantor
is sufficient to bring a derivative claim on behalf of a
corporation. However, as Mid-State II clearly explains, a
guarantor needs a direct injury to sue under either BHCA or
RICO. Stated otherwise, even under the federal law considered
in Mid-State II, the Kimmels, as guarantors, did not have
standing to bring a derivative claim. Mid-State II, 877 F.2d at
13
Majority op., ¶49.
10
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1335. Accordingly, any concern that the quoted language from
the majority opinion may be misinterpreted is quelled because
the majority opinion repeatedly concludes that a guarantor
cannot bring a derivative claim in Wisconsin. The majority
opinion explains "[b]ecause each is derivative, the Westburgs
have no standing to raise them given that they appear in this
action as guarantors."14 I agree with the majority opinion's
conclusion that the status of a guarantor is insufficient to
bring a derivative claim in Wisconsin.
D. The Westburgs' Direct Counterclaim
¶92 Park Bank asserts it had the right to freeze the
Westburgs' money-market account under the continuing guaranty;
the Westburgs allege Park Bank did not have that right. Both
the claim and the defense are founded on the guaranty contract
signed by the Westburgs on January 28, 2005.
¶93 Park Bank's rights under the guaranty contract are
very broad. First, the guaranty gives particularized notice to
the Westburgs that it is a continuing guaranty that includes
debt in existence on January 28, 2005, when the guaranty was
signed, as well as debt that accrues subsequently. The guaranty
provides:
You are being asked to guarantee the past, present and
future Obligations of Debtor. If Debtor does not pay,
you will have to. You may also have to pay collection
costs. Lender can collect the Obligations from you
without first trying to collect from Debtor or another
guarantor.
14
Majority op., ¶3.
11
No. 2010AP3158.pdr
Second, the guaranty specifically granted Park Bank rights in
regard to the personal money-market account that was frozen from
August 30, 2006 to September 7, 2006. In this regard, the
guaranty provides:
Guarantor grants to Lender a security interest and
lien in any deposit account Guarantor may at any time
have with Lender. Lender may, at any time after the
occurrence of an event of default and notice and
opportunity to cure, if required by § 425.105, Wis.
Stats.,15 set-off any amount unpaid on the Obligations
against any deposit balances Guarantor may at any time
have with Lender, or other money now or hereafter owed
Guarantor by Lender. . . . This Guaranty is valid and
enforceable against Guarantor even though any
Obligation is invalid or unenforceable against any
Debtor.
¶94 Third, it appears that Park Bank could have taken the
entire money-market account if Zaddo, Inc. or Zaddo Holdings
were in default of their obligations under the loan documents,
rather than simply preventing access to the account as was done
from August 30, 2006 until September 7, 2006. However, on the
15
Wisconsin Stat. § 425.105 addresses a merchant's
obligation to give notice of default and a right to cure to
consumers in consumer credit transactions. The Westburgs do not
argue to us that Park Bank is a "merchant" in regard to the
continuing guaranty, that the guaranty involved a "consumer
credit transaction," or that notice of default is required under
law. Accordingly, I do not address § 425.105 further.
12
No. 2010AP3158.pdr
documents presented in this review, it is not possible for me to
determine whether a default existed on August 30, 2006.16
¶95 It also is not possible to determine what damages the
Westburgs sustained during the period of time when they did not
have access to their personal account, as they do not
particularize the damages that they allege arose from Park
Bank's freezing their account for this period of time. Rather,
all of the damages they list on the document entitled
"Defendant's Counterclaimed Damages" rest upon an underlying
injury to the corporation. See Appendix of Appellants-
Petitioners, pp. 101-02. Those damages are derivative of the
corporations' injuries and may not be brought here, as I have
explained above.
¶96 Because the Westburgs identify no damages that
resulted from the temporary freeze of their personal account, I
agree with the majority opinion that without a particularized
statement of those damages, the Westburgs have not made a
16
The majority opinion is unclear when it says that Park
Bank made the required showing for summary judgment, and then
links that statement to: "The Westburgs do not challenge that
Zaddo became the subject of an insolvency proceeding when it
petitioned for a receivership." Majority op., ¶65. First, the
receivership is the insolvency proceeding. Second, the
Westburgs do point out that the receivership was filed on
September 7, 2006, but their personal account was frozen no
later than August 30, 2006. Therefore, in regard to the
freezing of their money-market account based on the allegation
that Zaddo, Inc. was in default, the Westburgs do allege Zaddo
was not in an insolvency proceeding when Park Bank froze their
personal account. Accordingly, payment of the obligations that
the Westburgs guaranteed could not be based on Zaddo's filing an
insolvency proceeding, which filing would have been a default
causing the guaranty to be available to Park Bank.
13
No. 2010AP3158.pdr
showing sufficient to overturn summary judgment dismissing the
Westburgs' direct counterclaim.17
III. CONCLUSION
¶97 In conclusion, I write separately to point out two
fundamental principles: (1) the rights and obligations of
guarantors are established by the guaranty contract, under which
the guarantor and the creditor for whose benefit the guaranty
was given operate; and (2) the majority opinion affirms that
only a shareholder or beneficial owner has standing to bring a
derivative claim in Wisconsin.18
¶98 I agree with the majority opinion that all
counterclaims and affirmative defenses raised herein, except
one, are derivative and therefore, they cannot be brought in
this action. However, because in some of its discussion, the
majority opinion could be read erroneously to equate
shareholders' rights and obligations with those of guarantors, I
do not join the majority opinion, but respectfully concur.
¶99 I am authorized to state that Justices ANNETTE
KINGSLAND ZIEGLER and MICHAEL J. GABLEMAN join this concurrence.
17
Majority op., ¶55 & n.12.
18
Majority op., ¶¶3, 67.
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No. 2010AP3158.pdr
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