Category: Wisconsin Supreme Court

Koss Corp. v. Park Bank (Liability for Embezzlement)

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In Koss Corp. v. Park Bank (2019 WI 7), the Wisconsin Supreme Court found that Park Bank was not liable for failing to protect Koss Corp. from its executive’s embezzlement. The court issued a plurality opinion written by Chief Justice Roggensack and Justice Ziegler, with a concurring opinion by Justices Anne Walsh Bradley, Abrahamson, and Dallet, upholding the lower court’s decision. Justices Kelly and Rebecca Bradley issued a dissent.

The case involved sophisticated and complicated embezzlement maneuvers by one of Koss Corporation’s executives, its vice president of finance. In total, the executive embezzled $31 million from the company.

The issue in the case was whether Park Bank acted in “bad faith” and was therefore liable for failing to protect Koss Corp. from the executive’s embezzlement. Because the statute does not define “bad faith,” the court grappled with what it means for a bank to act in bad faith. Justices Roggensack and Ziegler said bad faith is determined by acts evidencing dishonesty by the bank by willfully failing to investigate compelling and obvious known facts suggesting fiduciary misconduct due to a deliberate desire to evade knowledge of fiduciary misconduct.

Justices A.W. Bradley, Abrahamson, and Dallet agreed Park Bank was not liable, but came up with a different definition for bad faith and therefore did not join the lead opinion.

Justices Kelly and R.G. Bradley would have adopted a much lower standard for bad faith. They also found that the facts in this case could lead a jury to find that Park Bank acted in bad faith when it “remained intentionally ignorant of whether the individuals transacting business on Koss Corporation’s accounts had the authority to do so.”

 

Steadfast Insurance Co. v. Greenwich Insurance Co. (Duty to Defend)

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In Steadfast Insurance Co. v. Greenwich Insurance Co. (2019 WI 6), the Wisconsin Supreme Court said a previous insurer had a duty to defend Milwaukee Metropolitan Sewerage District (MMSD) for losses related to a rain event that occurred when MMSD had coverage with a subsequent insurer.

MMSD contracted with private companies to operate and maintain its sewerage system. Greenwich Insurance Co. insured United Water, which operated the system until February 29, 2008. Steadfast Insurance Co. insured Veolia, which subsequently operated the system. The rain event at issue here occurred in June 2008, when Steadfast was insuring Veolia and MMSD. However, it was alleged that United Water’s previous management was a cause of the June 2008 damage to the system. No damages were awarded to plaintiffs, but MMSD sought coverage for its defense costs in lawsuits resulting from the rain event. Steadfast paid $1.55 million for MMSD’s defense costs. Greenwich denied coverage to MMSD.

The court held that both the Steadfast policy and the Greenwich policy were primary and successive insurers of MMSD. Since the policies were not concurrent and they primarily insured two different entities (United Water and Veolia), Greenwich’s policy could not be an “other insurer” or excess insurer to the Steadfast coverage. Accordingly, the court held that Greenwich breached its duty to defend by erroneously determining it did not provide coverage for lawsuits arising from the June 2008 damage. The court emphasized that, in coverage disputes, insurers should move to bifurcate the coverage issue and stay the underlying liability issue to avoid risking a breach of duty to defend.

After determining Greenwich had a duty to defend, the court determined that Steadfast correctly brought a subrogation, not a contribution claim. The court then apportioned defense costs between the two insurers by applying a pro rata allocation based on the comparative value of the policy limits. Furthermore, the court awarded Steadfast attorney fees, arguing that Steadfast took the place of MMSD, and Greenwich would have owed MMSD attorney fees. This opinion marks the first time Wisconsin courts have awarded attorney fees for breach of a duty to defend from one insurer to another insurer who was subrogated to an insured’s rights.

The justices were split on several parts of the case, with three justices concurring in part and dissenting in part. Justice Ann Walsh Bradley, joined by Justice Rebecca Dallet, disagreed with the allocation of defense costs. Justice Walsh Bradley argued Greenwich should be liable for the entirety of the defense costs as a penalty for declining to uphold its duty to defend. However, Justice Walsh Bradley’s dissent also argues requiring Greenwich pay attorney fees sets a dangerous precedent because it departs from the “American Rule” that parties are responsible for their own attorney fees unless provided by contract or statute.

In another partial dissent, Justice R. Bradley agreed that defense costs should be allocated pro rata, but disagreed that Greenwich had a duty to defend. Justice R. Bradley noted that she agreed with Justice Walsh Bradley’s dissent regarding attorney fees.

Wisconsin Supreme Court Reins In Department of Natural Resources

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In a victory for property owners, the Supreme Court of Wisconsin held (6-1) that the Department of Natural Resources (DNR) does not have the authority to amend an expired construction permit (Myers v. Department of Natural Resources (2019 WI 5)). The opinion was authored by Justice Rebecca Dallet, her first opinion involving agency authority.

 

Facts

The DNR issued a permit to Philip and Terrie Myers to build a pier on Lake Superior. Over ten years later, DNR issued an amendment to the permit, requiring the Myers to significantly change their pier. The Myers filed a petition for judicial review of the DNR’s permit amendment. The issue before the Supreme Court was whether DNR has the statutory authority to amend the previously issued permit.

 

Court Decision

DNR argued that a condition within the permit stating “the authority herein granted can be amended or rescinded…” provided the agency authority to amend the permit. However, the court ruled that without explicit statutory authorization the condition itself did not allow DNR to amend the permit.

DNR further argued its statutory authority came from Wis. Stat. § 30.12(3m)(d)2. and § 30.12(3m)(c), which states that DNR “may establish reasonable conditions” in permits to satisfy certain statutory criteria for building piers. According to the DNR, the condition that DNR may amend the permit was such a “reasonable condition.” However, the court read the past tense of the statute to mean that the criteria must be satisfied only when the permit is granted. Once the permit is issued, the statute does not allow DNR ongoing review and authority to enforce whether the criteria are continuously being met.

Finally, DNR argued that Wis. Stat. § 30.2095(2), which states DNR may modify permits for good cause before their expiration, gave it authority to amend the Myers’ permit because the permit never expired.  However, the court, rejecting DNR’s reading of § 30.2095(1), determined the permit did expire because the Myers completed construction within the authorized three-year period.

In a dissent, Justice Walsh Bradley argued that DNR does have the authority to amend permits. Walsh Bradley states the statutes necessarily imply that DNR has the authority to continuously enforce the § 30.12(3m)(c) criteria. Furthermore, pier permits apply not only for construction but also for ongoing maintenance, so the Myers’ permit was not expired.

 

Yacht Club at Sister Bay Condo Association, Inc. v. Village of Sister Bay (Public/Private Nuisance)

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In Yacht Club at Sister Bay Condo Association, Inc. v. Village of Sister Bay (2019 WI 4), the Supreme Court determined that each nuisance-causing event at a town concert venue is a new “event” triggering a new 120-day notice period for filing a claim against the town.

The Village of Sister Bay built an outdoor concert venue near the Yacht Club condominiums. When the village began hosting loud concerts into the night, the Yacht Club filed a written notice of injury against the village, claiming the noise pollution was a nuisance. The notice stated the date of the last concert (Sept. 1, 2015).

The village moved to dismiss the Yacht Club’s suit, arguing that the Yacht Club failed to serve the notice within 120 days of the date when the concerts began (August 2014). Conversely, the Yacht Club argued each new concert is a new “event giving rise to the claim” as required by Wis. Stat. § 893.80(1d)(a).

The Supreme Court unanimously agreed with the Yacht Club that each concert is a new event because, depending on the level and length of noise, not every concert is necessarily a nuisance. Common law of nuisance says that continued nuisances are new events, and in the instant case this interpretation does not conflict with the intent of the notice of claim law to provide governments sufficient information to prepare for litigation.

 

Wisconsin Supreme Court Candidates Finalized

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Court of Appeals Judges Brian Hagedorn and Lisa Neubauer have both officially filed to run for the Wisconsin Supreme Court in the April 2019 election. Hagedorn and Neubauer will compete to replace Justice Shirley Abrahamson, who announced in May she will not run for re-election after four terms on the bench. With just two candidates running, there will be no statewide primary in the nonpartisan race.

Gov. Scott Walker appointed Hagedorn to the Court of Appeals in 2015. Hagedorn previously served as chief legal counsel to Walker, assistant attorney general to J.B. Van Hollen, and clerk for recently retired Wisconsin Supreme Court Justice Michael Gableman. Hagedorn was president of the Federalist Society at Northwestern Law School.

Judge Neubauer has served on the Second District Court of Appeals in Waukesha since she was appointed by Gov. Jim Doyle in 2007. She became chief judge in 2015. Prior to serving on the appeals court, Judge Neubauer was a partner at Foley & Lardner and clerked for U.S. Judge Barbara Crabb.

Court of Appeals Certification: Clean Wisconsin v. Department of Natural Resources

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The Court of Appeals District II submitted a certification this week asking the Wisconsin Supreme Court to take up Clean Wisconsin v. Department of Natural Resources. The issue in this case is whether 2011 Act 21 precludes DNR from considering cumulative environmental impacts in issuing high capacity well permits under Wis. Stat. § 281.34.

DNR argues that Act 21, which clarified that agencies may not enforce requirements unless explicitly permitted by statute or properly promulgated rule, prevents the agency from considering environmental impacts not specifically noted in the statutes. DNR’s argument relies on a May 2016 formal opinion from former Attorney General Brad Schimel.

Clean Wisconsin argues that the 2011 Supreme Court decision Lake Beulah Management District v. DNR still holds. Lake Beulah broadly held that DNR has the authority to preserve waters of the state under the constitutional and statutory public trust doctrines. Since the Supreme Court decided Lake Beulah after the enactment of Act 21 but declined to address the Act’s bearing on the case, a decision in the Clean Wisconsin case would clarify DNR’s authority on high capacity well permits and the general scope of Act 21 in environmental cases.

Supreme Court Decision: Engelhardt v. City of New Berlin (Governmental Immunity)

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In Engelhardt v. City of New Berlin (2019 WI 2), the Supreme Court held that the City of New Berlin was negligent when a child drowned on a field trip because the known and present danger exception to governmental immunity applied.

Lily Engelhardt drowned on a field trip with the City of New Berlin Parks and Recreation Department. Lily’s parents had previously informed a New Berlin staff member that Lily could not swim. The Engelhardts sued the city.

Government employees are immune from liability under Wis. Stat. § 893.80(4) unless certain exceptions apply. One exception states that government employees may be held liable if they fail to respond to a known, present, and compelling danger. In this case, the court held that the known and present danger exception did apply because the danger of a non-swimmer drowning on the field trip was compelling and obvious. The park staff failed to properly respond to this danger by taking Lily on the field trip without sufficient supervision, a life jacket, or a swim test.

In a concurring opinion, Justice Dallet (joined by Justices R. Bradley and Kelly) agreed that New Berlin was liable but argued the known and present danger exception did not apply here. Instead, Dallet found the city was not acting in a quasi-legislative or quasi-judicial function when it failed to supervise Lily on the field trip; therefore, governmental immunity did not apply under the language of § 893.80(4).

Supreme Court Decision: Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates, LLC (Arbitrability)

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In Midwest Neurosciences Associates, LLC v. Great Lakes Neurosurgical Associates (2018 WI 112), the Supreme Court held that circuit courts may decide whether a dispute should be arbitrated when an original contract contains a mandatory arbitration clause but a subsequent contract does not.

The parties in this case entered into an “Operating Agreement” contract with a noncompete restrictive covenant. The Operating Agreement contained a mandatory arbitration clause, incorporating by reference a rule that the arbitrator has jurisdiction to rule on arbitrability of disputes arising from the contract.

In the process of restructuring, Midwest and Great Lakes drafted a “Redemption Agreement” that contained a merger clause releasing Great Lakes from the terms of the Operating Agreement. Because Midwest did not officially sign the Redemption Agreement, the parties dispute whether it is enforceable.

The underlying litigation in this case involves whether Dr. Pannu violated a noncompete clause in the Operating Agreement by engaging in competitive practice after he signed the Redemption Agreement. The issue before the Supreme Court was whether the circuit court had authority to determine arbitrability despite the original Operating Agreement mandating arbitrability be determined by an arbitrator.

In a 5-1 ruling (Justice Ziegler, joined by Justices Walsh Bradley, Kelly, and Chief Justice Roggensack, with Justice Abrahamson concurring), the court determined that the circuit court can determine arbitrability when a subsequent contract does not contain an arbitration clause, even if the original contract mandated arbitration. The court stated that freedom of contract principles allow parties who have agreed to arbitrate to subsequently contract out of the arbitration agreement. The court also found that, if valid, the Redemption Agreement would supersede the Operating Agreement’s arbitration clause. However, because there were still issues of material fact as to whether both parties formally agreed to the Redemption Agreement, the Supreme Court remanded the case to circuit court to determine the validity of the Redemption Agreement.

In her concurring opinion, Justice Abrahamson suggested that, because the subject matter of the Redemption Agreement differed from the Operating Agreement, the Redemption Agreement did not entirely supersede all terms of the Operating Agreement. Abrahamson said circuit courts do have the authority to determine whether any part of a subsequent contract (here, the Redemption Agreement) supersede arbitration provisions in a previous contract.

In a dissent, Justice R. Bradley argued that the question of whether the Redemption Agreement supersedes the Operating Agreement is an issue of substantive arbitrability governed by the Operating Agreement. Therefore, an arbitrator – not the courts – should decide whether the Redemption Agreement is valid.

Supreme Court December Oral Arguments

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The Wisconsin Supreme Court will meet just once for oral arguments in December. Of note, the Dec. 11 oral arguments include West Bend Mutual Insurance Co. v. Ixthus Medical Supply, Inc. The case will determine whether West Bend has a duty to defend Ixthus in a case involving the alleged illegal domestic sale of diabetic glucose test strips.

Health care manufacturing company Abbott filed a suit against Ixthus, claiming that Ixthus wrongfully diverted test strips intended for international markets to domestic markets. Ixthus subsequently filed a claim with its insurer West Bend for a covered “advertising injury” under its policy.

West Bend argues there is no coverage because the policy also contained an exclusion for instances where the insured knowingly violates the rights of another. West Bend also argues there is no connection between Ixthus’s covered advertising activity and the injury to Abbott.

The Supreme Court will review the Court of Appeals District II decision that granted Ixthus coverage.

Supreme Court Decision: SECURA Insurance v. Lyme St. Croix Forest Co. (Occurrences from a Single Cause)

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In SECURA v. Lyme St. Croix Forest Co., LLC (2018 WI 103), the Supreme Court issued its first major decision of the 2018-19 term, ruling in a unanimous decision on a tort case involving insurance coverage for property damaged in the Germann Road Fire.

The issue before the court was whether multiple occurrences may arise from a single cause for insurance coverage purposes. In this case, SECURA argued that the fire spreading across multiple property lines was a single occurrence and thus coverage arising from the fire would be capped at the per-occurrence limit of $500,000. On the other hand, plaintiffs argued that a separate occurrence began each time the fire crossed into another property. Thus, coverage would be capped at $500,000 per property damaged, up to the policy’s $2 million aggregate limit.

The court ultimately sided with SECURA, determining that the fire was a single occurrence and coverage should be capped at the policy’s $500,000 per-occurrence limit. The court based its decision on the “cause theory” that says damages from a “single, uninterrupted cause” are a single occurrence. The court ruled the fire a single, uninterrupted cause and argued ruling otherwise would have arbitrary and unreasonable consequences.