Veritas Steel, LLC v. Lunda Construction Company

2020 WI 3
SUPREME COURT OF WISCONSIN
CASE NO.: 2017AP822
COMPLETE TITLE: Veritas Steel, LLC,
Plaintiff-Respondent,
v.
Lunda Construction Company,
Defendant-Third-Party
Plaintiff-Appellant-Petitioner,
v.
Bridge Resources, LLC n/k/a Bridge Fabrication
Holdings,
LLC, Alan Sobel, Matthew Cahill and Atlas
Holdings, LLC,
Third-Party Defendants-Respondents.
REVIEW OF DECISION OF THE COURT OF APPEALS
Reported at 385 Wis. 2d 210,923 N.W.2d 181
(2018 – unpublished)
OPINION FILED: January 15, 2020
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: September 19, 2019
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Dane
JUDGE: Frank D. Remington
JUSTICES:
DALLET, J., delivered the majority opinion of the Court, in
which ANN WALSH BRADLEY, ZIEGLER, REBECCA GRASSL BRADLEY, KELLY
and HAGEDORN, JJ., joined. ROGGENSACK, C.J., filed a concurring
opinion.
NOT PARTICIPATING:
ATTORNEYS:
For the defendant-third-party-plaintiff-appellant-
petitioner, there were briefs filed by Saul C. Glazer, Michael D.
Hahn, and Axley Brynelson, Madison. With whom on the brief was
Dean Thomson, Paul Ratelle, and Fabyanske Westra Hart & Thomson
PA, Minneapolis, Minnesota. There was an oral argument by Paul
Ratelle.
For the third-party-defendants-respondents, there was a brief
filed by Michael D. Leffel, Kevin M. LeRoy, Thomas L. Shriner, Jr.
and Foley & Lardener LLP, Madison and Milwaukee. With whom on the
brief was Richard Mancino, Jill K. Grant, Stuart R. Lombardi,
William O’Brien, Patricia O. Haynes, Joseph G. Davis, and Willkie
Farr & Gallagher LLP, New York, New York and Washington, DC. There
was an oral argument by Richard Macino.
2
2020 WI 3
NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2017AP822
(L.C. No. 2015CV509)
STATE OF WISCONSIN : IN SUPREME COURT
Veritas Steel, LLC,
Plaintiff-Respondent,
v.
Lunda Construction Company, FILED
Defendant-Third-Party JAN 15, 2020
Plaintiff-Appellant-Petitioner,
Sheila T. Reiff
v. Clerk of Supreme Court
Bridge Resources, LLC n/k/a Bridge Fabrication
Holdings, LLC, Alan Sobel, Matthew Cahill and
Atlas Holdings, LLC,
Third-Party Defendants-Respondents.
DALLET, J., delivered the majority opinion of the Court, in which
ANN WALSH BRADLEY, ZIEGLER, REBECCA GRASSL BRADLEY, KELLY and
HAGEDORN, JJ., joined. ROGGENSACK, C.J., filed a concurring
opinion.
REVIEW of a decision of the Court of Appeals. Affirmed.
¶1 REBECCA FRANK DALLET, J. Lunda Construction Company
(Lunda) alleges that Veritas Steel, LLC (Veritas), and third-party
defendants Atlas Holdings, LLC (Atlas), and Bridge Fabrication
No. 2017AP822
Holdings, LLC, took unfair advantage of PDM Bridge, LLC's (PDM)
loan defaults, "with the intent to gain ownership of PDM's
lucrative steel fabrication business for grossly inadequate
consideration through a secretive, unlawful and fraudulent process
designed to render PDM an empty shell with no assets remaining to
satisfy PDM's eight-figure liability to Lunda."
¶2 The circuit court granted summary judgment to Veritas on
Lunda's successor liability claim because there was no genuine
issue of material fact as to the de facto merger, mere
continuation, and fraudulent transaction exceptions to the general
rule against successor liability.1 The court of appeals affirmed
as to the de facto merger and mere continuation exceptions, the
only exceptions Lunda raised on appeal.2
¶3 The question before us is whether the de facto merger,
mere continuation, and fraudulent transaction exceptions to the
rule against successor liability apply in this case to impose
successor liability on Veritas. Lunda asks this court to read
Fish v. Amsted Indus., Inc., 126 Wis. 2d 293, 376 N.W.2d 820
(1985), as having expanded the de facto merger and mere
continuation exceptions. Lunda further asserts that the court of
appeals erroneously dismissed its successor liability claim in
light of the fraudulent transaction exception.
Judge Frank D. Remington of Dane County Circuit Court
1
presided.
Veritas Steel, LLC v. Lunda Construction Co., No. 2017AP822,
2
unpublished slip op. (Wis. Ct. App. Nov. 21, 2018).
2
No. 2017AP822
¶4 We reject Lunda's expanded reading of Fish, 126
Wis. 2d 293, and conclude that Lunda has not raised a genuine issue
of material fact as to an "identity of ownership" between Veritas
and PDM, the key component necessary to satisfy the de facto merger
and mere continuation exceptions. We further conclude that by not
raising the fraudulent transaction exception before the court of
appeals, Lunda forfeited that argument. We therefore affirm the
court of appeals.
I. FACTUAL BACKGROUND AND PROCEDURAL POSTURE
¶5 The facts of this case are lengthy and fairly complex.
PDM operated a steel fabrication business.3 In 2006, PDM entered
into a credit agreement with a syndicate of lenders for a $115
million term and $25 million revolving loan. As security for
repayment, the lenders obtained a first priority lien on
"substantially all of PDM's assets."
¶6 PDM's financial condition had begun to significantly
decline by 2011. PDM eventually defaulted on its obligations to
the lenders under the 2006 credit agreement. By 2013, PDM was
indebted to the lenders on secured debt with a face value of
approximately $76 million. In June 2013, the lenders and PDM
executed a forbearance agreement in which PDM agreed to either
sell itself to an interested acquirer or restructure with the
assistance of an investment banker.
3 American Securities, a private equity firm, purchased PDM
in 2006 and held it through a company called ASP PDM LLC. Like
the court of appeals, for ease of reference, we will use "PDM" to
refer both to the limited liability corporation and its only
member. See Veritas, No. 2017AP822, ¶6 n.2.
3
No. 2017AP822
¶7 Pursuant to the forbearance agreement, PDM retained an
investment banker to market a sale of the company for the highest
possible price. Of 136 potential acquirers contacted by the
investment banker, none of them offered a price that came close to
satisfying PDM's outstanding secured debt. The highest bid came
from Atlas, a private equity firm.
¶8 Rather than purchase PDM's assets directly, Atlas and
the lenders agreed that Atlas would acquire the lenders' secured
claims against PDM and then foreclose on PDM's assets. Atlas
caused the creation of a new entity, Bridge Resources, LLC, to aid
in the acquisition of PDM's assets. Bridge Resources subsequently
filed amended Uniform Commercial Code (UCC) financing statements,
in which it confirmed itself as the new administrative agent under
the credit agreement and verified its protected security interest
in PDM's assets. Through a series of transactions, affiliates of
Atlas and a co-investor purchased all of PDM's outstanding debt
directly from the lenders for approximately $22 million, which was
indicative of the value of PDM's assets.
¶9 PDM, having no prospect of paying back the outstanding
debt under the credit agreement, entered into a "transaction
support agreement" with Bridge Resources in October 2013. The
agreement anticipated that the parties would work towards a strict
foreclosure on the collateral securing PDM's loans in exchange for
partial satisfaction of PDM's obligations under the 2006 credit
agreement. To carry out the strict foreclosure, Atlas created a
subsidiary called Veritas, which was assigned a first priority
4
No. 2017AP822
lien on PDM's assets and eventually became the sole secured lender
under the credit agreement.4
¶10 In November 2013, PDM, Bridge Resources, and Veritas
executed a strict foreclosure agreement. PDM conveyed to Veritas
the collateral securing the loan in exchange for the discharge of
approximately $71 million out of $76 million of unpaid, secured
debt that PDM owed under the credit agreement.5 The strict
foreclosure agreement did not change the ownership or board
structure of PDM. It is undisputed that there was no stock or
other indicia of equitable ownership transferred from Veritas to
PDM. Further, no director or owner of PDM became a director or
owner of Veritas.
¶11 Meanwhile, in 2010, Lunda, a civil construction
contractor, entered into a subcontract with PDM, which required
PDM to provide steel for a bridge construction project. In 2012,
after PDM failed to perform, Lunda sued for breach of contract.
At the time that Veritas foreclosed on PDM's assets, Lunda had a
Veritas was formed in October 2013 by Bridge Fabrication
4
Holdings, Veritas's sole member. Bridge Fabrications Holdings and
Bridge Resources merged in 2014 and became BFH Holdings, LLC, which
is majority-owned by Atlas affiliates.
Pursuant to Uniform Commercial Code § 9-620, a debtor may
5
turn over to a lender the collateral for a loan in exchange for
full or partial satisfaction of a debt. Wisconsin's Uniform
Commercial Code has a similar provision, see Wis. Stat. § 409.620
(2017-18). There is no dispute that the transaction support
agreement and the subsequent strict foreclosure were in full
compliance with the procedures set forth in the UCC.
All subsequent references to the Wisconsin Statutes are to
the 2017-18 version unless otherwise indicated.
5
No. 2017AP822
contingent, unsecured breach of contract claim. It was not until
2014, after the strict foreclosure agreement was finalized, that
Lunda obtained a $16 million judgment against PDM. Lunda, as an
unsecured creditor, subsequently took steps under Wis. Stat.
§ 779.155 to assert a lien on funds owed to Veritas by the
Wisconsin Department of Transportation (DOT) for projects on which
PDM had worked.
¶12 In February 2015, Veritas commenced this action against
Lunda and sought a declaration that Lunda had no claim to payments
by the DOT for the projects at issue. Lunda asserted eight
counterclaims against Veritas and commenced a third-party action
against Atlas, Bridge Fabrication Holdings, and two former
officers of PDM.6 The circuit court granted Veritas's motion to
dismiss on six of Lunda's counterclaims. Only two claims remained:
a successor liability claim against Veritas7 and a claim against
Veritas, Atlas, and Bridge Fabrication Holdings under the
Wisconsin Uniform Fraudulent Transfer Act (WUFTA claim).8 Summary
6 The two former officers, Alan Sobel and Matthew Cahill, are
not involved in this appeal. Cahill, who was the CEO of PDM, and
Sobel, who was the CFO of PDM, continued for at least some period
of time in those roles at Veritas. However, neither had an owner's
interest in PDM or Veritas.
7 The circuit court had previously dismissed Lunda's successor
liability claim against Atlas and Bridge Fabrication Holdings,
which is not at issue in this case.
8 The circuit court had previously granted a separate motion
for summary judgment filed by Sobel and Cahill as to Lunda's WUFTA
claim.
6
No. 2017AP822
judgment motions on the remaining two claims were granted by the
circuit court.
¶13 On appeal, Lunda challenged the dismissal of its
successor liability claim against Veritas under the de facto merger
and mere continuation exceptions. Lunda also appealed the
dismissal of its WUFTA claim against Veritas and the third-party
defendants. The court of appeals affirmed the circuit court as to
both issues.9
¶14 Lunda petitioned this court for review and challenges
the dismissal of its successor liability claim against Veritas as
it relates to the de facto and mere continuation exceptions. Lunda
also alleges that the court of appeals erroneously dismissed its
successor liability claim in light of the fraudulent transaction
exception to the rule against successor liability.
II. STANDARD OF REVIEW
¶15 We review a decision on summary judgment using the same
methodology as the circuit court. Green Spring Farms v.
Kersten, 136 Wis. 2d 304, 314-15, 401 N.W.2d 816 (1987). Summary
judgment shall be granted where the record demonstrates "that there
is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law." Wis. Stat.
§ 802.08(2).
III. ANALYSIS
9The portion of the court of appeals' decision regarding
Lunda's WUFTA claim is not at issue here. See Veritas, No.
2017AP822, ¶¶36-42.
7
No. 2017AP822
¶16 We first discuss the purpose of the general rule against
successor liability and the exceptions to that rule as developed
in Wisconsin jurisprudence. We next clarify the de facto merger
and mere continuation exceptions and determine whether Lunda
raised a genuine issue of material fact as to these exceptions.
Finally, we decide whether Lunda forfeited its successor liability
claim as to the fraudulent transaction exception by failing to
raise it before the court of appeals.
A. The general rule against successor liability:
its purpose and relevant exceptions
¶17 It is well established that when a company sells or
transfers all of its assets to another company, the purchasing
company does not become liable for the transferring company's debts
and liabilities. See Fish, 126 Wis. 2d at 298 (quoting Leannais
v. Cincinnati, Inc., 565 F.2d 437, 439 (7th Cir. 1977))("'[a]
corporation which purchases the assets of another corporation does
not succeed to the liabilities of the selling corporation.'").
This general rule against successor liability was designed to
protect a bona fide purchaser from assuming the liabilities of a
predecessor corporation.10 See Springer v. Nohl Elec. Prods.
Although first applied in the corporate context, we have
10
recognized that the rule against successor liability also belongs
in the product liability context because:
[T]he successor corporation did not create the risk nor
did it directly profit from the predecessor's sale of
the defective product; it did not solicit the use of the
defective product nor make any representations as to its
safety; nor is it able to enhance the safety of a product
that is already on the market.
8
No. 2017AP822
Corp., 2018 WI 48, ¶15, 381 Wis. 2d 438, 912 N.W.2d 1. "'The
traditional rule of nonliability was developed . . . to protect
the rights of commercial creditors and dissenting shareholders
following corporate acquisitions, as well as to determine
successor corporation liability for tax assessments and
contractual obligations of the predecessor.'" Fish, 126
Wis. 2d at 303 (quoting Ramirez v. Amsted Indus., Inc., 431 A.2d
811, 815-16 (N.J. 1981)).
¶18 We have recognized four exceptions to the rule against
successor liability under the following circumstances:
(1) when the purchasing corporation expressly or
impliedly agreed to assume the selling corporation's
liability; (2) when the transaction amounts to a
consolidation or merger of the purchaser and seller
corporations; (3) when the purchaser corporation is
merely a continuation of the seller corporation; or (4)
when the transaction is entered into fraudulently to
escape liability for such obligations.
Tift v. Forage King Indus., Inc., 108 Wis. 2d 72, 75-76, 322
N.W.2d 14 (1982) (quoting Leannais, 565 F.2d at 439). These
exceptions illustrate the balance in successor liability law
between "two competing, and often conflicting, policy goals: to
provide a necessary remedy to injured parties, often tort
claimants, and to provide transactional clarity and certainty for
business parties engaged in fundamental corporate transactions."
Matheson, John H., Successor Liability, 96 Minn. L. Rev. 371, 372-
73 (2011).
Springer v. Nohl Elec. Prods. Corp., 2018 WI 48, ¶15, 381
Wis. 2d 438, 912 N.W.2d 1 (quoting Fish v. Amsted Indus., Inc.,
126 Wis. 2d 293, 307, 376 N.W.2d 820 (1985)).
9
No. 2017AP822
¶19 We focus our discussion on exceptions two and three,
also known as the de facto merger and mere continuation exceptions.
Both exceptions "are declaratory of tests to be applied to
encourage 'piercing the corporate veil'" and thus examine "the
substance and effect of business transformations or
reorganizations to determine whether the original organization
continues to have life or identity in a subsequent and existing
business organization." Tift, 108 Wis. 2d at 79. We resolve the
parties' dispute over the type of "identity" evidence necessary
for purposes of establishing these exceptions.
B. The de facto merger and mere
continuation exceptions defined
¶20 The de facto merger and mere continuation exceptions
were defined and then developed in three main cases: Tift, Cody
and Fish. This court first explicitly recognized the exceptions
in Tift, 108 Wis. 2d 72, a products liability action alleging
injuries caused by a "chopper box" tractor attachment. The chopper
box was first manufactured by a sole proprietorship, which turned
into a partnership and eventually "metamorphosed into" a
corporation, Forage King Industries. Id. at 74. Forage King
Industries consisted of two shareholders who had formed the
partnership, one of whom was the original sole proprietor. Id.
Throughout its different business forms, the company retained the
same employees, manufactured the same products, and sold to the
same dealers. Id. at 74-75.
¶21 In 1975, just before the plaintiff was injured, all of
the Forage King Industries stock was purchased by another
10
No. 2017AP822
corporation that continued to operate as Forage King Industries
and manufacture the same products. Id. at 75. The plaintiff
commenced an action against Forage King Industries and its insurer,
alleging that the company was a successor to the manufacturer of
the chopper box and was therefore responsible for the plaintiff's
injuries. Id.
¶22 We applied the "rules of corporate law" and reasoned
that the de facto merger and mere continuation exceptions
"demonstrate that, when it is the same business organization that
one is dealing with, whether it be by consolidation, merger, or
continuation, liability may be enforced" because "[t]hese are
tests of identity." Id. at 79. We thus concluded that, despite
organizational transformation, the present Forage King Industries
was "substantially identical to the organization that manufactured
the allegedly defective chopper box and [was] therefore liable."11
Id. at 80.
¶23 The mere continuation exception to successor liability
was further developed in Cody v. Sheboygan Mach. Co., 108
Wis. 2d 105, 321 N.W.2d 142 (1982). The plaintiff sued Sheboygan
Machine Company for injuries caused by a defective sander. Id. at
109. The defective sander had been manufactured by the original
Sheboygan Machine Company, but that company sold its assets and
its name to a different company, who again resold the company
The court in Tift did not distinguish between the
11
application of the de facto merger and mere continuation
exceptions. See Tift v. Forage King Indus., Inc., 108 Wis. 2d 72,
79-80, 322 N.W.2d 14 (1982).
11
No. 2017AP822
assets and name. Id. at 107-08. The plaintiff brought suit
against Sheboygan Machine Company, a corporation that shared the
same name as the manufacturer of the sander but functioned
exclusively as a repair shop. Id. at 108-09. Sheboygan Machine
Company shared none of the officers, directors, or stockholders as
the predecessor companies. Id. at 108.
¶24 Citing to the facts of Tift and the principles enunciated
in that case, the Cody court concluded that the mere continuation
exception did not apply because the facts did "not demonstrate any
continuity or identity of business organizations" between the two
entities in question. Id. at 106. The Cody court concluded that
the second corporation "was an entirely different corporation" and
that the "subsequent businesses were markedly different in
character and purpose from the original manufacturer" and "were
not continuations of the original business." Id. at 111.
¶25 This court refined the de facto merger and mere
continuation exceptions several years later in Fish, 126
Wis. 2d 293. The Fish plaintiffs alleged injuries resulting from
the use of a power press manufactured by Bontrager Construction
Company. Id. at 295-96. The plaintiffs filed suit against Amsted
Industries, Inc., the company that acquired Bontrager's assets and
continued to make the power press, and South Bend II, the company
who subsequently bought the power press line from Amsted. Id. at
295-97. They alleged that, as successor corporations, Amsted and
South Bend II were liable for the acts of Bontrager in
manufacturing the allegedly defective power press. Id. at 297.
All parties agreed that the traditional exceptions to the rule
12
No. 2017AP822
against successor liability did not apply to the case, but the
plaintiffs argued that Tift expanded both the de facto merger and
mere continuation exceptions. Id. at 298. The plaintiffs argued
that "identity" meant "identity of assets, operations and identity
of the product, rather than identity of ownership." Id. at 300-
01 (emphasis added).
¶26 The Fish court plainly rejected the argument that Tift
expanded the de facto and mere continuation exceptions: "the
[p]laintiffs are in error in alleging that the Tift decision has
expanded the exceptions to the rule of nonliability." Id. at 301.
The court specified that "[i]dentity refers to identity of
ownership, not identity of product line." Id. The court affirmed
dismissal of the successor liability claim as related to both
exceptions because "there [was] not sufficient identity between
Bontrager and either Amsted or South Bend II to justify holding
them liable for the acts of their predecessor." Id. at 295.
¶27 The Fish court also delineated the "key elements"
required to meet the de facto and mere continuation exceptions.
In determining whether a de facto merger has occurred, the "key
element" "is that the transfer of ownership was for stock in the
successor corporation rather than cash." Id. at 301. The "key
element" to resolve whether the successor is a mere continuation
of the seller corporation "'is a common identity of the officers,
directors and stockholders in the selling and purchasing
corporations.'" Id. at 302 (quoting Leannais, 565 F.2d at 440).
C. The requirement of identity of ownership
13
No. 2017AP822
¶28 As Fish made clear, the de facto and mere continuation
exceptions to the rule against successor liability require
evidence of identity of ownership.12 For the de facto merger
exception, identity of ownership hinges on whether "the transfer
of ownership was for stock in the successor corporation rather
than cash." Fish, 126 Wis. 2d at 301. It is important to recognize
that transfer of ownership may still exist even where the successor
entity does not have stock to offer the acquired entity. In such
cases, proof of identity of ownership may be established through
equity ownership.13 For example, equity ownership could take the
form of membership interests in a limited liability corporation.14
12As one federal district court correctly noted, "it would
appear that the Wisconsin Supreme Court [in Fish] has effectively
determined that, absent a transfer of stock ownership, other merger
factors are insufficient to sustain application of the de facto
merger exception." Smith v. Meadows Mills, Inc., 60 F. Supp. 2d
911, 917 (E.D. Wis. 1999). The Smith court also reflected that,
"it appears that the Wisconsin Supreme Court [in Fish] has made
one factor——identity of ownership——a necessary requirement for the
mere continuation exception to apply." Id. at 918.
13Lunda contends that there is "inconsistency" between
Wisconsin's statutory merger law, Wis. Stat. § 180.1101, which
allows for exchange of shares of one entity for "cash or property"
of another, and the stock transfer requirement under the de facto
merger exception. As support, Lunda cites to a footnote in the
court of appeals' decision. See Veritas, No. 2017AP822, ¶32 n.11.
A statutory merger pursuant to § 180.1101 is distinct from a de
facto merger in that it involves two companies formally stating
their intentions to merge and following statutory procedures to
effectuate the merger.
14 Not all entities will fit within the de facto merger
exception. Where there is no ownership interest to be transferred,
as in a case involving nonprofit corporations, the de facto merger
exception does not apply. As one federal court commented, "[t]he
policies underlying the no successor liability principle are
geared toward encouraging economic actors to function effectively
14
No. 2017AP822
¶29 As to the mere continuation exception, identity of
ownership is established where there "'is a common identity of the
officers, directors and stockholders in the selling and purchasing
corporations.'" Fish, 126 Wis. 2d at 302 (quoting Leannais, 565
F.2d at 440).15 Some evidence, like the common identity of
stockholders, will support application of both the de facto merger
and mere continuation exceptions. However, unlike the de facto
merger exception, the mere continuation exception may be
established with evidence of the continuation of the same officers,
directors, and stockholders under circumstances where there is no
transfer of equity or stock ownership.
¶30 Despite Fish's clear mandate that identity of ownership
is the key inquiry, Lunda asserts that Fish significantly expanded
the de facto merger and mere continuation exceptions to allow the
substitution of "identity of management and control" for identity
of ownership. In support of its argument, Lunda highlights the
Fish court's use of the phrase "identity of management and control"
twice in the decision: once, in addressing Tift, where the court
said there was an "identity of management and control throughout
the transformation from sole proprietorship to partnership;" and
again, in discussing Cody, where the court said there was "no
in a market economy and have no application in the context of non-
profit and non-stock organizations." Gallenberg Equip., Inc. v.
Agromac Int'l, Inc., 10 F. Supp. 2d 1050, 1056 (E.D. Wis. 1998).
15Tift and Fish relied upon Leannais v. Cincinnati, Inc., 565
F.2d 437 (7th Cir. 1977), for the basic principles regarding
successor liability. See Veritas, No. 2017AP822, ¶24 n.8
(describing the Leannais case).
15
No. 2017AP822
identity of management and control throughout the transfers of
ownership." Fish, 126 Wis. 2d at 302. Lunda further cites to IGL
and Gallenberg for the proposition that courts post-Fish have not
required identity of ownership. IGL-Wis. Awning, Tent & Trailer
Co., Inc. v. Greater Milwaukee Air & Water Show, Inc., 185 Wis. 2d
864, 520 N.W.2d 279 (Ct. App. 1994); Gallenberg Equip., Inc. v.
Agromac Int'l, Inc., 10 F. Supp. 2d 1050 (E.D. Wis. 1998).
¶31 Identity of ownership remains the sine qua non of
successor liability. Although the phrase "identity of management
and control" was used to describe the transfers of ownership in
Tift and Cody, the Fish court maintained that identity of ownership
is required to meet the de facto merger and mere continuation
exceptions. The Fish court explained that in Tift there was
identity of ownership because "the identical organization
continued to manufacture the same product" and in Cody there was
not identity of ownership because "the successor corporation was
an entirely different corporation" with "'no common identity of
officers, directors and stockholders between the two companies.'"
Fish, 126 Wis. 2d at 300, 302 (quoted source omitted).
¶32 Contrary to Lunda's assertion, courts post-Fish have
required proof of identity of ownership to establish the de facto
merger and mere continuation exceptions. Lunda contends that the
IGL court "impos[ed] successor liability based on a finding that
there was 'identity of management and control' of two
corporations." However, in concluding that the mere continuation
exception applied, the court of appeals in IGL relied upon the
circuit court's finding of fact that "'[f]or all intents and
16
No. 2017AP822
purposes, only the name of the business changed.'" IGL, 185
Wis. 2d at 870.16 The IGL court additionally relied upon the
circuit court's finding of fact that "[t]he identical organization
in substance continued to operate with the same persons . . ."
including the same director who formed the predecessor nonprofit
corporation. Id. at 868, 870.
¶33 Similarly, in Gallenberg, the federal court rejected the
plaintiff's successor liability claim because the "plaintiff
cannot show continuity of ownership," which it described as "the
common thread" of the de facto merger and mere continuation
exceptions. Gallenberg, 10 F. Supp. 2d at 1054. The court refused
to consider the argument that by actively managing the predecessor
corporation for a time period before the asset purchase, the
successor corporation's owners were "de facto shareholders" and
exercised pre-transfer control. Id. at 1056. The Gallenberg court
concluded that the plaintiff wrongly "equate[d] control with
ownership. They are not the same." Id. Both IGL and Gallenberg
thus required evidence of identity of ownership in order to meet
the relevant exceptions to successor liability at issue in each
case.
16The mere continuation exception was the only exception to
the general rule against successor liability that was addressed by
the court in IGL-Wis. Awning, Tent & Trailer Co., Inc. v. Greater
Milwaukee Air & Water Show, Inc., 185 Wis. 2d 864, 520 N.W.2d 279
(Ct. App. 1994).
17
No. 2017AP822
¶34 We reject Lunda's reading of Tift and Fish17 and decline
to broaden the exceptions to the rule against successor liability,
as we have declined to do in the past. See Fish, 126 Wis. 2d at
303-12 (rejecting the plaintiff's arguments in favor of adopting
a "product line" exception and "expanded continuation" exception
to the rule).18 Identity of ownership, not identity of management
and control, remains the essential element that a plaintiff must
establish under both the de facto merger and mere continuation
exceptions.
D. No genuine issue of material fact regarding
identity of ownership
¶35 The facts in this case do not establish identity of
ownership between Veritas, the asset purchaser, and PDM, the
seller, under either the de facto merger or mere continuation
exceptions. In regards to the de facto merger exception, it is
undisputed that there was no stock or other indicia of equity
ownership transferred from Veritas to PDM. Therefore, there was
no de facto merger as a matter of law and Lunda's claim under this
exception must fail.
¶36 As to the mere continuation exception, Atlas and its
subsidiaries, including Veritas, were strangers to Lunda prior to
17Lunda does not dispute that we must affirm the court of
appeals if we reject its interpretation of Fish, 126 Wis. 2d 293.
18Expanding the exceptions to the rule against successor
liability would also be inconsistent with its important objective:
to provide "transactional clarity and certainty for business
parties engaged in fundamental corporate transactions." Matheson,
John H., Successor Liability, 96 Minn. L. Rev. 371, 373 (2011).
18
No. 2017AP822
receiving a call from an investment banker regarding the prospect
of purchasing PDM. Veritas and PDM had separate and distinct
ownership before and after Veritas foreclosed on PDM's assets. No
director or owner of PDM became a director or owner of Veritas.
Based on this lack of common identity of officers, directors, and
stockholders in the selling and purchasing corporations, the mere
continuation exception does not apply.
¶37 Lunda has not raised a genuine issue of material fact as
to identity of ownership under either the de facto merger or mere
continuation exceptions and therefore its successor liability
claim must fail.
E. Forfeiture of Lunda's successor liability claim based
upon the fraudulent transaction exception
¶38 Finally, Lunda asserts that the court of appeals
erroneously dismissed its successor liability claim in light of
the fraudulent transaction exception to the rule against successor
liability.19 Veritas contends that Lunda forfeited this argument
when it failed to raise the exception before the court of appeals.20
We agree.
19In its third-party complaint, Lunda referred to the
exception as the "fraudulent purpose exception." It has also been
referred to as the "fraudulent transfer exception" and the
"fraudulent transaction exception." Like we did in Springer, 381
Wis. 2d 438, we will refer to it as the fraudulent transaction
exception so as to not mistake it for the WUFTA claim.
20Veritas also contends that Lunda never pursued this
exception before the circuit court on summary judgment; however,
as detailed herein, that is inaccurate.
19
No. 2017AP822
¶39 A chronological summary of the circuit court proceedings
and subsequent appellate briefing illustrates how Lunda forfeited
this argument. When Lunda filed its counterclaims and third-party
complaint in response to Veritas's declaratory judgment action, it
asserted a successor liability claim based on three exceptions to
the rule against successor liability: de facto merger, mere
continuation, and fraudulent transaction. At the same time, Lunda
also pleaded a statutory WUFTA claim. Lunda's brief in opposition
to Veritas's motion for summary judgment included argument on only
the de facto merger and mere continuation exceptions, and its WUFTA
claim. But, at oral argument before the circuit court, the
fraudulent transaction exception was raised and both parties
confirmed its existence within the dispute. The circuit court's
final order explained that it found no genuine issue of material
fact as to successor liability "under any of the theories that
Lunda advanced, whether de facto merger, mere continuation, or
fraudulent [transaction]," and that it also found no dispute as to
Lunda's WUFTA claim. (Emphasis added.)
¶40 In its brief to the court of appeals, Lunda chose not to
raise an argument as to the circuit court's adverse ruling on the
fraudulent transaction exception. Instead, Lunda argued that
there were "genuine issues of material fact as to the elements of
the de facto merger and mere continuation" exceptions, and as to
its WUFTA claim.
¶41 Lunda suggests that this court's recent decision in
Springer, 381 Wis. 2d 438, revives its claim for successor
liability on the basis of the fraudulent transaction exception.
20
No. 2017AP822
In Springer, we concluded that a fraudulent transfer under WUFTA
did not supplant the common-law fraudulent transaction exception
to the rule against successor liability. Id., ¶29.
¶42 The court of appeals reached its decision in this case
in November 2018, several months after publication of Springer,
and addressed the only issue related to fraudulence that was
presented by Lunda: its WUFTA claim. See Veritas, No. 2017AP822,
¶¶36-42. Because Lunda failed to pursue the fraudulent transaction
exception on appeal, the holding in Springer is of no import.
Lunda failed to preserve on appeal its successor liability claim
as to the fraudulent transaction exception and this court's
decision in Springer cannot revive it. We decline to address this
forfeited claim.
IV. CONCLUSION
¶43 We conclude that because Lunda did not establish a
genuine issue of material fact as to identity of ownership between
Veritas and PDM, it cannot satisfy the de facto merger or mere
continuation exceptions to the rule against successor liability.
We further conclude that by not raising the fraudulent transaction
exception before the court of appeals, Lunda forfeited its claim
for successor liability based on that exception. We therefore
affirm the court of appeals.
By the Court.—The decision of the court of appeals is
affirmed.
21
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¶44 PATIENCE DRAKE ROGGENSACK, C.J. (concurring). There
is no question of fact that Atlas's related entities purchased PDM
Bridge, LLC's (PDM)1 secured debt from PDM's lenders with the
intent to obtain control of PDM. They did so through strict
foreclosure of that secured debt, which resulted in ownership of
PDM's assets without encumbrance by any debt with lower priority
than the secured debt that drove the foreclosure.
¶45 Lunda Construction Company (Lunda) asserts that the
strict foreclosure does not save Veritas's assets from its $16
million judgment against PDM. Before us, Lunda contends that
Veritas is the same corporation as PDM, but with a different name,
due to de facto merger and mere continuation doctrines. Lunda
also asserts that Veritas's intent to remove PDM's assets from its
reach gives rise to common law and statutory fraud claims that
open Veritas's assets to collection for Lunda's judgment against
PDM.
¶46 Therefore, the question before us is whether, given the
undisputed facts, Atlas lawfully removed PDM's assets from Lunda's
reach by the actions it and its affiliates took, which actions
culminated in strict foreclosure that prevented Lunda's claims
from reaching Veritas's assets. As I explain below, my answer to
that question is yes. Accordingly, although I do not join the
majority opinion, I respectfully concur in the majority opinion's
dismissal of Lunda's claims against Veritas.
PDM was a non-stock Delaware corporation with a single
1
member, ASP PDM, LLC (ASP), which also was a non-stock Delaware
corporation.
1
No. 2017APAP822.pdr
I. BACKGROUND
¶47 PDM was a steel bridge fabrication company with offices
in Illinois and fabrication facilities in Wisconsin and Florida.
In 2006, to continue in business, PDM obtained financing from a
syndicate of lenders (the Syndicate), which provided PDM loans
evidenced by a $115 million note and a $25 million line of credit.
The Syndicate collateralized its loans with PDM's real estate and
personal property, both tangible and intangible, by filing
appropriate mortgages and financing statements to protect its
interests. ASP also pledged its member interest in PDM to the
Syndicate thereby giving corporate control of PDM to the Syndicate.
¶48 PDM's financial difficulties continued. In December of
2011, PDM suffered losses in excess of $63 million and was in
default of its financial commitments to the Syndicate. The
Syndicate and PDM entered into a Forbearance Agreement, wherein
PDM agreed to "restructure" its operations.
¶49 In 2012, PDM's financial troubles continued, producing
another loss in excess of $63 million. Its financial difficulties
also were affecting Lunda. In July of 2012, Lunda sued PDM for
breach of contract with damages alleged to be in excess of $16
million.2
¶50 Notwithstanding the 2011 "restructuring," PDM continued
to have general financial difficulties. PDM also was unable to
meet the terms of the 2011 Forbearance Agreement between it and
the Syndicate.
2 Due to a series of intervening events, Lunda did not obtain
a judgment on this debt until 2014.
2
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¶51 In June of 2013, the principal amount of PDM's debt to
the Syndicate was approximately $70 million and PDM was insolvent.
PDM was in default of its credit agreement with the Syndicate.
Due to PDM's financial condition, the Syndicate and PDM entered
into a second Forbearance Agreement3 wherein PDM became obligated
to retain assistance of an investment banker to sell its business
as a going concern or to sell all of its assets on or before
September 20, 2013.
¶52 To accomplish those tasks, PDM retained Houlihan Lokey
Capital, Inc., a well known investment banker with experience
selling distressed companies. Although the investment banker
contacted 136 potential purchasers, only six letters of interest
were obtained. No responding entity was willing to pay enough to
cover the Syndicate's outstanding $70 million debt. Atlas, a
private equity firm and industrial holding company, was the highest
bidder, offering $33 million as a net purchase price for PDM.
¶53 Upon learning that Lokey's efforts to sell PDM had not
been successful, Atlas, and two other unsuccessful bidders in the
potential sale of PDM, offered to purchase the Syndicate's secured
debt for varying amounts. Atlas did so because it determined that
if properly restructured, PDM could be a valuable asset for Atlas's
investors.
¶54 In August 2013, Atlas created Bridge Resources, LLC
(Bridge Resources), with Atlas as its majority member. Bridge
Resources and another Atlas entity, paid the Syndicate
3 There is no evidence that Veritas, Atlas and Bridge
Fabrications Holdings, LLC (BFH) were parties to the Forbearance
Agreement or had an interest in PDM's debt or equity at the time
the Forbearance Agreement was executed.
3
No. 2017APAP822.pdr
approximately $22 million for all of the Syndicate's secured debt
and the ASP pledge. Bridge Resources became the administrative
agent of the secured debt. Appropriate financing statements and
mortgages were filed on all of PDM's personal and real property,
giving Bridge Resources a perfected security interest in all PDM's
assets.
¶55 In September 2013, Bridge Resources created Bridge
Fabrications Holdings, LLC (BFH).4 In October of 2013, to
accomplish strict foreclosure of PDM's assets, BFH created Veritas
Steel, LLC (Veritas) to which rights in PDM's secured debt were
transferred.5
¶56 On November 5, 2013, Veritas conducted a Wis. Stat.
§ 409.620 strict foreclosure procedure on all the secured debt via
a Strict Foreclosure Agreement. In that Agreement, Veritas agreed
to assume only those PDM liabilities that were expressly set forth
in the agreement.
¶57 Strict foreclosures on the secured debt permitted
Veritas to own all PDM assets in satisfaction of the debt that PDM
had originally incurred during the Syndicate financing.6 At the
4 BFH's members were Lapetus Capital LLC, Atlas Resources, LP
and SHP; Capital Solutions Fund, LP and Atlas Capital Resources,
LP.
5 BFH was Veritas's sole member. In October of 2013, BFH
created BFH Secured Lending and was its sole member; then in
December of 2013, Bridge Resources merged into BFH.
6 Pursuant to Wis. Stat. § 409.620 (U.C.C. § 9-620) a creditor
can foreclose on debt collateralized by personal property of a
type that is subject to Wis. Stat. ch. 409 (U.C.C. ch. 9) and
accept the collateral in full or partial satisfaction of the debt.
Foreclosures of PDM's real property proceeded under differing
statutory provisions depending on the location of the real
4
No. 2017APAP822.pdr
conclusion of strict foreclosure, Veritas owned all of PDM's
assets, cleansed of all secured and unsecured debts that were
subordinate to the secured debt that Veritas owned.
¶58 In March of 2014, Lunda obtained a judgment of
approximately $16 million against PDM, which it filed in Wisconsin
in July of 2014 and in Illinois in September of 2014. In July of
2014, Lunda commenced an action in Wisconsin to obtain funds from
the Wisconsin Department of Transportation (DOT) pursuant to Wis.
Stat. § 779.155 based on its judgment against PDM.7
¶59 In February 2015, Veritas commenced this lawsuit as a
declaratory judgment action due to Lunda's Wis. Stat. § 779.155
action seeking payments from DOT, which Veritas claimed belonged
to it. Lunda counterclaimed, alleging that Veritas was PDM by
another name; and therefore, Veritas's assets were subject to
Lunda's claims for payment of its $16 million judgment against
PDM.
¶60 Lunda contended that Veritas is the same entity as PDM
due to a de facto merger of PDM, or as a mere continuation of PDM.
Lunda also asserted that the strict foreclosure procedures
employed were grounded in common law or statutory fraud and
therefore, permit Lunda to collect its debt from Veritas's assets.
The circuit court dismissed Lunda's complaint against Veritas, and
the court of appeals affirmed that dismissal.
II. DISCUSSION
A. Standard of Review
property. See Wis. Stat. § 846.15 et seq.
7 PDM was dissolved in August of 2014.
5
No. 2017APAP822.pdr
¶61 Here, we review summary judgment granted to Veritas. In
so doing, we independently employ the same methodology as the court
of appeals and the circuit court. Wisconsin Pharmacal Co., LLC v.
Nebraska Cultures of Cal., Inc., 2016 WI 14, ¶12, 367 Wis. 2d 221,
876 N.W.2d 72. Summary judgment is to be granted "if the
pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Id. (quoting Wis.
Stat. § 802.08(2) (2013-14)).
B. Corporate Assets
1. General Rule
¶62 When one corporation buys the assets of another
corporation in a commercial context, the transferee corporation
generally does not succeed to the transferor's debts. Marie T.
Reilly, Making Sense of Successor Liability, 31 Hofstra L. Rev.
745 (2003). However, a court may decide that the transferee
corporation should be treated as a successor corporation and be
liable for the transferor's debts. Id. at 746. In the matter
before us, strict foreclosure, a Wis. Stat. § 409.620, et seq.
remedy available to secured creditors, is the context in which to
evaluate Lunda's claims.8
8There are occasions when federal law causes the purchasing
corporation to be liable for the acts of the transferor
corporation. See Kathryn A. Barnard, EPA's Policy of Corporate
Successor Liability Under CERCLA, 6 Stan. Envtl. L. J. 78 (1986-
1987). CERCLA and its policy concerns are not present here. I
mention CERCLA only because the context in which successor
corporate liability is evaluated is important.
6
No. 2017APAP822.pdr
¶63 Wisconsin follows the general rule, wherein a
corporation that purchases the assets of another corporation in a
commercial context is not liable for the obligations of the selling
corporation. See Fish v. Amsted Indus., Inc., 126 Wis. 2d 293,
298, 376 N.W.2d 820 (1985). The general rule stated above promotes
alienability of corporate assets and is in accord with policies
that promote productive use of business assets. Gallenberg Equip.,
Inc. v. Agromac Int'l, Inc., 10 F. Supp. 2d 1050, 1053 (1998).
2. Exceptions
¶64 In Wisconsin, there are four exceptions to the rule of
non-liability for the transferee corporation:
(1) when the purchasing corporation expressly or
impliedly agreed to assume the selling corporation's
liability; (2) when the transaction amounts to a
consolidation or merger of the purchaser and seller
corporations; (3) when the purchaser corporation is
merely a continuation of the seller corporation; or
(4) when the transaction is entered into fraudulently to
escape liability for such obligations.
Fish, 126 Wis. 2d at 298 (quoting Leannais v. Cincinnati, Inc.,
565 F.2d 437, 439 (7th Cir. 1977)).
¶65 Lunda contends that the strict foreclosure employed here
caused a de facto merger between PDM and Veritas. In evaluating
a claim of de facto merger, appellate precedent considers whether:
(1) the assets of the seller corporation are acquired
with shares of the stock in the buyer corporation,
resulting in a continuity of shareholders; (2) the
seller ceases operations and dissolves soon after the
sale; (3) the buyer continues the enterprise of the
seller corporation so that there is a continuity of
management, employees, business location, assets and
general business operations; and (4) the buyer assumes
those liabilities of the seller necessary for the
uninterrupted continuation of normal business
operations.
7
No. 2017APAP822.pdr
Sedbrook v. Zimmerman Design Grp., Ltd., 190 Wis. 2d 14, 20-21,
526 N.W.2d 758 (Ct. App. 1994) (quoting Parson v. Roper Whitney,
Inc., 586 F. Supp. 1447, 1449 (W.D. Wis. 1984)). However, as we
explained in Fish, "[t]he key element in determining whether a
merger or de facto merger has occurred is that the transfer of
ownership was for stock in the successor corporation rather than
cash." Fish, 126 Wis. 2d at 301 (quoting Leannais, 565 F.2d at
439).
¶66 In the matter before us, Lunda has provided nothing from
which we could conclude that PDM's member, ASP, received membership
status in Veritas, upon foreclosure, at the time of asset transfer
or at any other time. The assets of PDM were obtained in exchange
for satisfaction of approximately $65 million of PDM's $70 million
of secured debt, which Veritas then held.9 Veritas's position
relative to the assets that belonged to PDM did not arise due to
a merger or a de facto merger of PDM with Veritas.
¶67 Lunda also contends that Veritas is a mere continuation
of PDM; that it is the same corporation, but with a different name.
In evaluating a claim that one corporation is a mere continuation
of an earlier corporation, we consider whether there is "a common
identity of the officers, directors and stockholders in the selling
and purchasing corporations." Leannais, 565 F.2d at 440. In Tift,
we cited Leannais and also focused on "identity." As we explained:
When viewed in the context of a tort caused by a
defective product, these two "exceptions" merely recite
that, where either one is applicable, there is
"identity," because in substance the successor business
9 Five million dollars of secured debt remained and was
retained by Veritas together with the assets that secured it.
8
No. 2017APAP822.pdr
organization which the plaintiff sues is, despite
organizational metamorphosis, the same business
organization which manufactured the product which caused
his injury.
Tift v. Forage King Indus., Inc., 108 Wis. 2d 72, 78, 322 N.W.2d
14 (1982). Our major concern in Tift was whether a company that
began as a sole proprietorship, proceeded to a partnership and
ended as a corporation could be liable for a product manufactured
by an earlier business form that was not corporate. Id. at 76-
77. However, lest there be confusion on the meaning of "identity,"
in Fish, we explained that "[i]dentity refers to identity of
ownership, not identity of product line." Fish, 126 Wis. 2d at
301.
¶68 In the matter before us, there is no identity of
ownership between PDM and Veritas. Both PDM and Veritas have LLC
non-stock structures, but there was no overlap in their members or
in their creators. PDM, a Delaware LLC, had a single member, ASP.
Veritas, also a Delaware limited liability company, has a single
member, BFH. BFH's members do not include ASP or PDM. While non-
stock corporations generally are controlled by their articles and
owned by their members, the articles of neither PDM nor Veritas
are in the record before us. There is no proof in the record that
supports the conclusion that Veritas and PDM have the same
ownership. While it appears that Matt Cahill,10 who was the CEO
of PDM, and Alan Sobel, who was the CFO of PDM, continued for at
least some period of time in those roles at Veritas, neither had
an owner's interest PDM or in Veritas. Accordingly, Veritas does
10 Cahill was replaced as CEO in April of 2014.
9
No. 2017APAP822.pdr
not meet the criteria necessary for us to conclude that it is a
mere continuation of PDM.
¶69 Lunda also contends that because Veritas foreclosed by
using strict foreclosure procedures that were designed to
eliminate all debt that had a lesser priority than the debt Atlas
affiliates purchased from the Syndicate, the transactions at issue
here were fraudulent as to Lunda.11 Therefore, Lunda reasons the
general rule that the purchasing corporation is not responsible
for the debts of the seller does not apply; and accordingly, it
has the right to execute its $16 million judgment against Veritas's
assets.
¶70 The elements of common law fraud are: (1) a
representation of fact that the speaker intends the hearer to rely
on; (2) which the speaker either knows is untrue, or makes with
reckless disregard for its truthfulness; (3) another believes such
representation and relies on it; (4) with resulting damage.
Ollerman v. O'Rourke Co., Inc., 94 Wis. 2d 17, 25, 288 N.W.2d 95
(1980) (quoting Whipp v. Iverson, 43 Wis. 2d 166, 169-170, 168
N.W.2d 201 (1969)).
11Lunda pled common law fraud and the circuit court addressed
it. Lunda also raised it in its arguments before us. The majority
opinion applies forfeiture and does not address this contention
because Lunda did not continue this allegation before the court of
appeals. Majority op., ¶¶38-42.
Forfeiture is a doctrine of judicial administration. See
State v. Soto, 2012 WI 93, ¶¶35, 36, 343 Wis. 2d 43, 817 N.W.2d
848. Because Lunda's contention arises in a commercial context
where statutory procedures under ch. 409 were employed and
guidance may be helpful to future commercial litigants, I choose
to address Lunda's contention.
10
No. 2017APAP822.pdr
¶71 We recently addressed common law fraud in Springer v.
Nohl Elec. Prods. Corp., 2018 WI 48, 381 Wis. 2d 438, 912 N.W.2d
1, in the context of a products liability claim that alleged
successor corporation liability. There, Mrs. Springer claimed
that her husband died from exposure to asbestos-containing
products, which occurred during his employment for a company that
preceded Nohl. Id., ¶2. She sued Nohl to recover for his injuries
and death. Id. We explained that the fraudulent transfer of
assets exception to non-liability "has rarely been used to impose
successor liability for products liability claims." Id., ¶17
(citing Restatement (Third) of Torts: Products Liability § 12
cmt. e (Am. Law Inst. 1998); Timothy J. Murphy, A Policy Analysis
of a Successor Corporation's Liability for Its Predecessor's
Defective Products When the Successor Has Acquired the
Predecessor's Assets for Cash, 71 Marq. L. Rev. 815, 819 (1988).
¶72 In Springer, we painted the fraud exception with broad
strokes that left the particulars of that exception for another
day. We said, "The fraudulent transaction theory turns on the
intention underlying the transfer of assets to [the successor],
i.e., whether it was made with an actual intention to hinder,
delay, or defraud creditors." Springer, 381 Wis. 2d 438, ¶19
(quoting United States ex rel. Bunk v. Gov't Logistics N.V., 842
F.3d 261, 276 (4th Cir. 2016)). We also said that "the fraudulent
transfer exception, [in] the law [of] every
jurisdiction . . . requires a finding that the corporate transfer
of assets 'is for the fraudulent purpose of escaping liability.'"
Id. (quoting Raytech Corp. v. White, 54 F.3d 187, 192 (3d Cir.
1995) (alterations in original)). The wrongful intent of the
11
No. 2017APAP822.pdr
person seeking to avoid liability was critical to our decision in
Springer. Id., ¶19.
¶73 It is important to note that Springer arose in the
context of a products liability claim. It did not involve strict
foreclosure of secured debt pursuant to Wis. Stat. § 409.620.
Lunda gave little attention to the commercial context in which its
claim arose, yet an understanding of the context in which Lunda
makes its claim and Veritas raises its defense is critical.
Therefore, a brief overview of strict foreclosure will be helpful
to the reader's understanding of my discussion that follows.
¶74 "Article 9 of the Uniform Commercial Code (U.C.C.)
permits a secured creditor to elect among several alternative
remedies in the event of a default by the debtor."12 LaRoche v.
Amoskeag Bank, 969 F.2d 1299, 1302 (1st Cir. 1992). Subsequent to
debtor default, the secured creditor may dispose of the collateral,
"as long as it does it in a 'commercially reasonable manner.'"
Id. at 1303. However, a secured creditor also may choose to
proceed by strict foreclosure, which is a different statutory
opportunity. Id.
¶75 Strict foreclosure permits a secured creditor "to retain
the collateral in complete satisfaction of the indebtedness." Id.
"Disputes about valuation or even a clear excess of collateral
value over the amount of obligations satisfied do not necessarily
demonstrate the absence of good faith." Michael L. Monson, Strict
Foreclosure Under Article 9: Benefits, Risks, and Strategies, 43
No. 1 UCC L.J. (Oct. 2010), 3.
12Wisconsin Stat. ch. 409 is the Wisconsin equivalent of
Uniform Commercial Code chapter 9.
12
No. 2017APAP822.pdr
¶76 When a secured party employs strict foreclosure pursuant
to statute and accepts the collateral in full or partial
satisfaction of the debt owed:
(1) the debt is discharged to the extent consented to by
the debtor, (2) all of the debtor's rights in the
collateral are transferred to the secured party, (3) the
security interest that was the subject of the debtor's
consent and any subordinate security interest or other
subordinate liens are discharged, and (4) any other
subordinate interests are terminated. . . . After the
secured party has accepted the collateral it may resell
the collateral to a subsequent purchaser, keep it, or
otherwise deal with it as its own property.
Id. at 6.
¶77 Wisconsin Stat. § 409.620's authorization of strict
foreclosure has a number of mandatory procedures and the
availability of objections that could stop the process. For
example, subordinate secured creditors have a right to notice of
the proposed strict foreclosure, Wis. Stat. § 409.621(1), and a
right to object to using strict foreclosure, Wis. Stat.
§ 409.620(1)(b). However, on November 5, 2013, when Veritas
strictly foreclosed on the debt that was secured by PDM's assets,
Lunda was not a subordinate secured creditor. Therefore, Lunda
did not have the opportunity to object to Veritas' use of strict
foreclosure.
¶78 In addition, Lunda has not claimed that the strict
foreclosure that occurred here did not satisfy the statutory
obligations of Wis. Stat. ch. 409. Lunda simply contends that
because the strict foreclosure process was used to cleanse assets
of debt the process was fraudulent.
¶79 Lunda's argument misses its mark because
Wis. Stat. ch. 409 was created in part to do exactly what happened
13
No. 2017APAP822.pdr
here. Veritas's conduct was not fraudulent because it was not
wrongful in this commercial context.13 Stated otherwise, I
conclude that a creditor that strictly forecloses in a commercial
context in accord with the statutory procedures set out in ch. 409
to avoid the claims of debtors with lesser priority does not
exhibit wrongful intent that supports a claim of common law fraud.
Accordingly, the broad statements about "fraudulent intent" set
out in Springer have no application here.
¶80 My conclusion that strict foreclosure under Wis. Stat.
§ 409.620 does not support Lunda's fraud claim is reinforced by
Wis. Stat. § 242.08(5)(b). Statutory fraud, Wisconsin Uniform
Fraudulent Transfer Act (WUFTA), is set out in Wis. Stat. ch. 242.
Lunda sought to use WUFTA to void the transfer of PDM's assets to
Veritas. However, § 242.08(5)(b) provides that a transfer is not
voidable if it results from "Enforcement of a security interest in
compliance with ch. 409." Here, there is no question that the
transfer of personal property, tangible and intangible, occurred
through enforcement of a security interest under § 409.620 et seq.
WUFTA also has no application here.
13Chapter 409's legislation for secured transactions is
complicated. An understanding of the claim and defense and the
context in which they arise is critical. Here, we have strict
foreclosure between commercial parties engaged in commercial
transactions.
14
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III. CONCLUSION
¶81 The question before us is whether, given the undisputed
facts, Atlas lawfully removed PDM's assets from Lunda's reach by
the actions it and its affiliates took, which actions culminated
in strict foreclosure that prevented Lunda's claims from reaching
Veritas's assets. As I explained above, my answer to that question
is yes. Accordingly, although I do not join the majority opinion,
I respectfully concur in the majority opinion's dismissal of
Lunda's claims against Veritas.
15
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1