02-2618 Finch v. Southside Lincoln-Mercury, Inc., et al.

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Plaintiffs owned a corporation that operated two Ford car dealerships; they sold the assets to Ford, which reincorporated and appointed three Ford employees to serve as directors; the corporation then leased the land and buildings from the plaintiffs for more than two years, until the corporation transferred its franchise rights to Ford (for no value, at a time when plaintiffs claim the fair market value was in excess of $1 million); when the corporation announced that it was insolvent and would not be paying further rent, plaintiffs brought this action against the corporation, the directors, and Ford, claiming breach of fiduciary duty, tortious interference with contract, and fraudulent transfer; the district court, relying on the non-recourse provision of the asset sale contract, granted the defendants’ motion to dismiss.

The non-recourse provision, bars recourse against any…stockholder…director or employee… whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise….”

We conclude that the circuit court erred in dismissing the plaintiffs’ claims for breach of fiduciary duty and fraudulent transfer claims, which are premised on actions allegedly taken by the directors and Ford to divest the corporation of a valuable corporate asset, thereby rendering the corporation unable to pay its debts. In pursuing these claims, the plaintiffs are not relying on their contractual rights, but on their status as creditors of an insolvent corporation. The lease may become relevant in determining damages, but it does not control resolution of whether the defendants breached any fiduciary duties or whether Ford was the recipient of a fraudulent transfer under Wis. Stat. ch 242.

Even though the tortious interference claim rests squarely on the plaintiffs’ contractual relationship with the corporation, we conclude that, under the Restatement rule, as embraced by the Wisconsin Supreme Court in Merten, 108 Wis. 2d at 212-13, and subsequent cases, an exculpatory clause such as this nonrecourse provision, though otherwise valid as applied to some causes of action, cannot operate to relieve a party from the consequences of intentional or reckless conduct.

Even though all three of plaintiffs’ claim survive the language of the nonrecourse provision, applying Wisconsin law, we conclude that plaintiffs, as individual creditors alleging a general breach as to all creditors, do not have standing to bring their claim for breach of fiduciary duty.

We affirm the appealed order insofar as it dismissed the plaintiffs’ claims against the directors and Ford for breach of fiduciary duties; we reverse the dismissal of the tortious interference with contract claim against the defendants and the UFTA claim against Ford; we remand to the circuit court for further proceedings on these claims.

Order affirmed in part; reversed in part and cause remanded with directions.

Recommended for publication in the official reports.

Dist IV, La Crosse County, Mulroy, J., Deininger, P.J.

Attorneys:

For Appellant: Paul R. Norman, Madison; Sarah A. Zylstra, Madison

For Respondent: Gregory P. Seibold, Madison