Generally speaking a party suing your business, if they obtain a judgment against your business, is going to be able to collect against the assets (or at least the unsecured assets) of your business.

This can vary from getting a receiver appointed to force the liquidation of company assets, to freezing business bank accounts, or even having the Sheriff go in and collect cash directly from the cash register to help satisfy the judgment. Thus, if your business has more value in assets than the potential judgment amount, it may be worth contesting the lawsuit or trying to reach a settlement. If not, then you can explore whether you can simply close up shop and move on.

Under Wisconsin law you are not allowed to simply close up shop and raid all of the assets of the business just to avoid a creditor. Neither are you allowed to sell all of the assets to a friend or relative (or anyone for that matter) for a severe discount just to avoid creditors. For example, if your business was Bob’s cleaning Company Inc. and your business were sued, you cannot simply sell all of your business assets to your brother for $1 and open up Joe’s Cleaning Company Inc. This would be known as a “fraudulent transfer” and is covered by Wis. Stat. Section 242.04

242.04 Transfers fraudulent as to present and future creditors.

(1) A transfer made or obligations incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(a) With actual intent to hinder, delay or defraud any creditor of the debtor; or

The statute provides some guidelines for determining “intent to hinder, delay or defraud any creditor of the debtor.” Some of those include:

• The transfer or obligation was to an insider;
• The debtor retained possession or control of the property transferred after the transfer;
• Before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
• The transfer occurred shortly before or shortly after a substantial debt was incurred; and
• The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Additionally, it is considered to be a fraudulent transfer if the transfer is made:

242.04(1)(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
2. Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

Not only does this statute prevent you from intentionally disposing of assets to avoid creditors, it also raises issues if you are intending to legitimately sell your business’s assets and you have been sued or you have outstanding creditors. You need to ensure that the transfer cannot be categorized as a fraudulent one.

In any event, if you or your business is sued it is best to immediately see a lawyer who can explore your options with you. If you play your cards right though, one of those options may be to simply close your doors and move on to your next, hopefully more successful, venture.

To determine what damages you may be entitled to, first we look to the Wisconsin Standard Jury Instructions: “3710 Consequential Damages for Breach of Contract.”

The law provides that a person who has been damaged by a breach of contract shall be fairly and reasonably compensated for his or her loss. In determining the damages, if any, you will allow an amount that will reasonably compensate the injured person for all losses that are the natural and probable results of the breach.

This leaves us with the instruction that damages are “all losses that are the natural and probable results of the breach,” but what does that mean? To figure that out, we look to the relevant case law to see how Wisconsin Courts have interpreted that term.

The Wisconsin Courts have really focused on “foreseeability” as the main component of determining damages. The Court, in Thorp Sales Corp. v. Gyuro Grading Co., 111 Wis.2d 431 held

An injured party is only entitled to the benefit of his or her agreement, which is the net gain he or she would have realized from the contract but for the breach. Thorp Sales Corp. v. Gyuro Grading Co., 111 Wis.2d 431, 438-39, 331 N.W.2d 342 (1983).

The Court has also explained how prospective profits, not prospective revenues, fall into that determination:

The long-established rule in Wisconsin, stated in Buxbaum v. G.H.P. Cigar Co., 188 Wis. 389, 392, 206 N.W. 59 (1925), holds that “prospective profits are a legitimate item of damages resulting from a breach of contract when the circumstances are such that the future profits may be computed with some reasonable certainty.” See also 2 The Law of Damages in Wisconsin § 26.16 (Russell M. Ware ed., 2d ed.1995).

The key is that the potential revenues must be shown and offset by the potential costs.

Prospective profits must be diminished by charges composing an essential element in the cost of manufacture or service. Schubert v. Midwest Broad. Co., 1 Wis.2d 497, 503, 85 N.W.2d 449 (1957).

Wisconsin Standard Jury Instruction 3735 “Damages: Loss of Expectation” sets out the standard described in the case law above:

The measure of damages for a breach of contract is the amount which will compensate the plaintiff for the loss suffered because of the breach. A party who is injured should, as far as it is possible to do by monetary award, be placed in the position in which he or she would have been had the contract been performed. The fundamental basis for an award of damages for breach of contract is just compensation for losses necessarily flowing from the breach. A party whose contract has been breached is not entitled to be placed in a better position because of the breach than the party would have been had the contract been performed. The injured party is entitled to the benefit of his or her agreement, which is the net gain he or she would have realized from the contract but for the failure of the other party to perform. Wis JI-Civil 3735 (emphasis added).

Wis JI-Civil 3725 addresses damages and future profits; no mention is made of lost revenue. Revenue loss is not an appropriate consequential damages award.

While this is going to differ in every case, and depend on the specific facts and the nature of the breach, it is important to realize that the only consequential damages that Wisconsin Courts are going to award are those which you can prove were foreseeable losses and missed profit due to the breach.

In Brew City Redevelopment Group, LLC v. Ferchill Group 297 Wis.2d 606, the Wisconsin Supreme Court defines the economic loss doctrine as

“a judicial doctrine intended to preserve the fundamental distinction between contract and tort. It works to prevent a party to a contract from employing tort remedies to compensate the party for purely economic losses arising from the contract.” citing Grams v. Milk Prods., Inc., 2005 WI 112, ¶ 2, 283 Wis.2d 511, 699 N.W.2d 167

How this is actually applied to business litigation however is a constantly changing and liquid concept. The Court seems to be moving towards a hybrid approach of not banning Tort completely, but trying to ensure that anything that could be plead under contract law is not simply plead in Tort law.

In Brew City Redevelopment Group, LLC there was a tort claim through Wis. Stat. § 134.01 for injury to business and restraint of will, as well as several breach of contract claims. The Wisconsin Supreme Court held that the economic loss doctrine did not apply to BrewCity’s Wis. Stat. §134.01 claim for three reasons,

First, § 134.01 claims do not depend on a contract in order to lie. Second, the allegations underlying BrewCity’s § 134.01 claim are different allegations than those underlying BrewCity’s breach of contract claims. Finally, the damages BrewCity alleges under its breach of contract claims are different from the damages it alleges under the malicious injury claim. Brew City Redevelopment Group, LLC at ¶ 25

The Court goes on to point out

“[t]hat BrewCity seeks financial recovery is not tantamount to its losses being economic losses for the purposes of the economic loss doctrine. An injury is not ‘economic’ simply because it is monetary. All losses-even those stemming from injuries to the person or damage to property-are monetary in nature” Id. at ¶ 32

This analysis by the Wisconsin Supreme Court is especially telling as it shows that the Court is not willing to limit tort cases, even in contract disputes, if the allegations fall clearly outside of the realm of contract.

Where it gets really interesting for Business lawsuits is that the Wisconsin Supreme Court has also held that the Economic Loss Doctrine does not apply to contracts relating solely to services.

The significance of the economic loss doctrine is that ‘it requires transacting parties in Wisconsin to pursue only their contractual remedies when asserting an economic loss claim, in order to preserve the distinction between contract and tort.’ ” (citation omitted). As tort law generally offers a “broader array of damages than contract[, t]he economic loss doctrine precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies.” This is a reasonable and unsurprising policy in light of the protections afforded by the U.C.C.

That is, [p]rotection against damages caused by a defective product injuring itself is the purpose of express and implied warranties provided for in the U.C.C. When a product fails to operate as warranted or expected, the proper avenue for relief is a breach of warranty claim. Alternatively, customers can reject the product or revoke their acceptance and sue for breach of contract.¶ 29, 688 N.W.2d 462 (citations omitted). Moreover, the U.C.C. provides protections for manufacturers as well–manufacturers can limit their risks and exposure by disclaiming warranties or limited remedies. ¶ 31, 688 N.W.2d 462. Thus, ‘if a commercial purchaser were allowed to sue in tort to recover solely economic loss, the U.C.C. provisions designed to govern such disputes could be circumvented entirely. In that event, the U.C.C. would be rendered meaningless and ‘contract law would drown in a sea of tort.’ ” (citation omitted).

Given the above rationale for why the Economic Loss Doctrine applies in UCC cases, the Court when on to state:

Unlike contracts for products or goods, which enjoy the benefit of well-developed law under the U.C.C., no such benefit exists for contracts for services. This is because the U.C.C. does not apply to service contracts. As a result, the built-in warranty provisions that the U.C.C. may provide in a contract for the sale of products or goods would not apply to a contract for services.

So, while the Economic Loss Doctrine does prevent some claims, specifically suing for tort for defective products, the WIsconsin Supreme Court has cut away a lot of its applicability to most business lawsuits. While it is something to keep in mind when beginning any suit, it is good to know that businesses are still able to bring claims in tort that involve business relationships.

Wis. Stat. 706.02 sets out the following:

1) Transactions under s. 706.001(1) shall not be valid unless evidenced by a conveyance that satisfies all of the following:

• (a) Identifies the parties; and
• (b) Identifies the land; and
• (c) Identifies the interest conveyed, and any material term, condition, reservation, exception or contingency upon which the interest is to arise, continue or be extinguished, limited or encumbered; and
• (d) Is signed by or on behalf of each of the grantors; and
• (e) Is signed by or on behalf of all parties, if a lease or contract to convey; and
• (f) Is signed, or joined in by separate conveyance, by or on behalf of each spouse, if the conveyance alienates any interest of a married person in a homestead under s. 706.01(7) except conveyances between spouses, but on a purchase money mortgage pledging that property as security only the purchaser need sign the mortgage; and
• (g) Is delivered. Except under s. 706.09, a conveyance delivered upon a parol limitation or condition shall be subject thereto only if the issue arises in an action or proceeding commenced with 5 years following the date of such conditional delivery; however, when death or survival of a grantor is made such a limiting or conditioning circumstance, the conveyance shall be subject thereto only if the issue arises in an action or proceeding commenced within such 5-year period and commenced prior to such death.

Fortunately the Legislature has also provided form WB-11 Residential Offer to Purchase which meets the requirements of the statute.

If you are involved in a transaction for Real Property that was not in writing, contact an attorney right away. Wisconsin Statute 706.04 sets out the ability for the courts to find as a matter of equity that the transaction met all of the requirements in 706.02 and possibly help you if you have bought or sold a property without a written contract.

I am very interested to see what the complaint states, as well as how the city responds. Apparently the organization 9to5, which appears to be a branch of the National Association of Working Women, is prepared to file an amicus briefs to support the city in a lawsuit. (An amicus brief is a brief that a third party can submit in support of a party in the action).

I try my best to stay very politically neutral in these posts, but I want to address one portion of this argument. In the above mentioned article is the following

Amy Stear, 9to5 Wiscsonin Director said the MMAC’s decision disregards Milwaukee residents who voted 130,562 to 60,796 Nov. 4 to approve the ordinance in binding referendum.

“Essentially,” Stear said, “they’re saying that they don’t care what’s important to us.”

Regardless of the merits one way or the other of the referendum, basically saying that it is right because the majority wants it, is a very weak argument. Throughout the history of this country there have been some very bad ideas that are held by the majority. As recently as fifty years ago (and perhaps more recently) there were portions of the this country where the majority felt that blacks should not be able to vote. I am by no means saying this is the same situation, but “majority is right,” in my mind, is a very bad argument. If the referendum had said, “Everyone in Milwaukee gets $10,000,” I am sure it would have passed, but it would not have made it legal, or a good idea.

The final piece of information I would love to get my hands on, is what percentage of Business Owners in Milwaukee, live in the city of Milwaukee. I have a feeling that an overwhelming majority of the people that this referendum adversely affects, business owners, were not even able to voice their opinion on the matter, as they did not get to vote on the referendum.

What does this mean? The Wisconsin courts are saying to sellers that you need to make a choice as to whether to sue for actual damages or simply accept the earnest money, you cannot go after both when a buyer backs out of a deal. Earnest money is intended to be a form of insurance against buyers backing out of the offer. If you decide to keep the earnest money, then that is the extent of the damages that you can receive.

It seems that this decision will impact sellers in a couple of ways. One, there is now some incentive to require a higher earnest money amount from buyers. While this would not have been a problem a couple of years ago, sellers are no longer in the position to be especially picky about the offers that they will consider. The other is that we may see a chilling effect on the number of lawsuits for actual damages. This number is usually low anyway, but now that the earnest money must be returned prior to seeking actual damages many more people may choose to simply take the bird in the hand versus the two in the bush and accept the earnest money as liquidated damages and move on.

You can read the Appellate Court’s as yet unpublished decision at http://www.wisbar.org/res/capp/2008/2007ap001799.htm

There is nothing wrong with this approach, as the statute is well written, but it is important to understand what happens under that statute. The Wisconsin LLC disassociation statute is 183.0802 and of particular interest in subsection (3)(a), which covers voluntary withdrawal from the LLC.

(3)(a) Except as provided in par. (b), a member may voluntarily withdraw from a limited liability company at any time by giving written notice to the other members, or on any other terms as are provided in an operating agreement. If the withdrawal occurs as a result of wrongful conduct of the member, the limited liability company may recover from the withdrawing member damages as a result of the wrongful conduct and may offset the damages against the amount otherwise distributable to the member, in addition to pursuing any remedies provided for in an operating agreement or otherwise available under applicable law.

This is pretty self explanatory, if you are being removed, or remove yourself due to some act of wrongdoing, maybe theft or fraud, of course the remaining LLC members can come after you for the amount due. If you simply want to leave you can do so, but it is subject to subsection 3(b)

(b) If a member acquired an interest in a limited liability company for no or nominal consideration or owns an interest as to which the power to withdraw is prohibited or otherwise restricted in the operating agreement, the member may withdraw from the limited liability company with respect to that interest only in accordance with the operating agreement and only at the time or upon the occurrence of an event specified in the operating agreement. If the operating agreement does not specify the time or the event upon the occurrence of which the member may withdraw, a member who acquired an interest in the limited liability company for no or nominal consideration may not withdraw prior to the time for the dissolution and commencement of winding up of the limited liability company without the written consent of all members of the limited liability company. Unless otherwise provided in an operating agreement, in the case of a limited liability company that is organized for a definite term or particular undertaking, the operating agreement shall be considered to provide that a member may not withdraw before the expiration of that term or completion of that undertaking.  (emphasis added)

The highlighted portion is the most interesting part of the provision. I think you could call this a “sinking ship” provision in the sense that it prohibits members that had no stake in the game, but joined the LLC and thus had the potential for profit, from abandoning ship when things get tough. This would be unfair to the other members and any creditors that may be left holding the bag if that member leaves.

It is an important provision to keep in mind, and perhaps is something to consider when setting up your LLC or perhaps when amending your operating agreement.

Even though there are many different parts of a contract and some of them can be quite long, there is a way to think about contract drafting as a three part system. I call them “Information”, “Action”, and “Insurance”:

INFORMATION SECTION:

This is the easy part of the contract, it simply states what the contract is about, who is involved, and where the actions should take place. Take a look at the top of a fictitious contract-

This is about as simple as it comes, but it is illustrative as to the general idea of the “Information” stage of a contract. Often a more detailed explanation of what each party does, or perhaps where their relationship to each other is already at, but at the core of it, the “Information” section simply explains who is in the contract and what they want to contract for. This section is more formally known as the Recitals section.

ACTION SECTION:

To me this is the most important, and often most overlooked part of a contract, especially by those drafting contracts without the help of an Attorney. The most important aspect of the contract is setting out exactly what it is that the parties are contracting for. This takes work and some foresight, but the dividends for spending the extra time upfront pay off 10 fold in its ability to prevent and resolve future disputes.

Here is a small section from the “Action area” of a fictitious contract for the management of a golf course.

Even this example is a bit simplistic, but you can see that the statement “XYZ shall manage and maintain ‘Green Acres’ golf course as a first class facility.” Many do it yourself contracts would simply leave it at that. At the beginning of a new deal, everyone is excited and it seems everyone is on the same page. It is not until later that problems may arise.

So, instead we go on to define a “first class” facility in specific detail all the way down to the length of the grass on the greens.

Imagine a scenario where the owner of the course is upset that the Managing company is not keeping the course nice enough. Without all of the sub-categories defining what a “first class facility” is, you are stuck arguing over, and possibly litigating a subjective standard. With the added detail in the “Action” section, now the dispute is an objective one. (ie- either the greens were kept within the 1″ standard or they were not.”)

Having such specificity not only makes future litigation easier, it can make it completely unnecessary. Both parties go into the deal knowing what is expected of them, and knowing what the outcome of any litigation would be because it is so plainly spelled out.

INSURANCE SECTION:

In the above two section I mentioned that the “Action” part of a contract is the most important part of a contract; and it is, but mainly because of how it relates to the “insurance” part of a contract. Everything that is discussed below about the “insurance” part is almost useless without a properly written “Action” section of a contract. If however, the “action” portion properly leads into the “insurance” section, you can create a piece of paper that does exactly what it is designed to do, protect your business in case of emergency.

Below are some cut and pasted examples of the “Insurance” section of a contract.

Probably the most important part to be clear on is what happens in case of breach. All too often this section is left out, or is inadequate. The purpose of having a contract to protect you is that in the event the other party does not live up to its obligation, you should not have to go to court as the remedies are already clearly laid out. With a well written contract, even if you do have to go to court, you may be able to succeed at summary judgment and get your attorneys’ fees paid for.

Going hand in hand with breach provisions are the provisions outlining when the contract ends and how it will unwind. This can be a complicated issue and requires a fair amount of foresight to think of the many possible outcomes. Not adequately addressing what happens in certain situations or setting out when the contract should end or unwind can easily leave either party in a lurch and lead to easily preventable litigation.

Finally, there is the boilerplate language. Things such as indemnification, survival, modification, and choice of law. These are all provisions that are standard to every contract and are usually even included in those internet form contracts that you can download and fill-in. While I could go on for pages about little things and tweaks that are often missed, I wanted to mention one provision in particular that is routinely incorrect, even in Attorney generated contracts, and that is the “Choice of Law” provision. Whenever you make the choice of which State’s law should apply, the caveat that the State’s “conflict of law” laws should not apply must be included. Most states have statutes that determine which state’s law should apply in the case of a possible conflict or just multi-jurisdictional deals. So, applying Wisconsin law uniformly also means that you are applying Wisconsin’s conflict of law statutes which tell you to look at Illinois law instead, which is exactly what you did not want to have happen.

This is a brief overview at best of what is involved in drafting a contract, but it should give you a good idea of the types of things that should be included and hopefully impresses upon people the need not just for a written contract, but for a well written contract. As I always like to say, “an ounce of prevention is worth a pound of cure.”

Attorney Sean M. Sweeney

You can read my regular blog at www.MilwaukeeBusinessLawBlog.com

Coca Cola has protected its secret formula for over 100 years, and Krispy Kreme for almost 80 years through Trade Secret protection. In order to qualify for Trade Secret protection you must take reasonable efforts to maintain its secrecy. Trade Secret protection works well for products that are not easily reverse engineered. While you can protect a Trade Secret against theft of the secret, or divulgence by employees, you are not protected if someone can reverse engineer the product, if the secret is made available through research or publication, public use, or if someone independently invents the same thing.
So, Trade Secret law is not the end-all be-all of protection, but it is important to realize that in some cases (especially those involving chemical reactions) Trade Secret protection may be much more valuable to your company than a patent for the product.

Sean M. Sweeney

You can read my regular blog at www.MilwaukeeBusinessLawBlog.com