Closely-held corp.’s former shareholder can sue accountant

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An Oct. 2 opinion from the Wisconsin Court of Appeals enables shareholders in closely-held corporations to settle their grievances with each other, sever their ties, and move on, while preserving the ability to pursue third parties, such as accountants who may also be liable for damages.

In this case, Henry J. Krier and Michal Vilione owned three separate but related companies: EOG Environmental, Inc. (EOG Environmental), EOG Disposal and Vil-Kri.

A dispute arose between the two owners, and Krier filed suit against Vilione, alleging use of corporate assets for personal purposes. The suit settled, and under the terms of the settlement, Krier became the sole owner of EOG Disposal and Vil-Kri, while Vilione became the sole owner of EOG Environmental.

The settlement exempted any claims of Krier, EOG Disposal and Vil-Kri (hereinafter Krier) against the accountant, who also happened to be Vilione’s brother, Donald, and his accounting firm, Virchow Krause & Co., LLP.

Krier filed suit against Donald Vilione and Virchow Krause (hereinafter Virchow Krause), alleging a number of claims, and contending that Virchow Krause knowingly falsified the accounting records to conceal misappropriation of funds by Michael Vilione.

The circuit court granted summary judgment in favor of Virchow Krause, concluding that only EOG Environmental and its current stockholders had standing, and that Krier could not plead a diminution of value claim for damages done to the corporations.

Krier appealed, and the court of appeals reversed, in a decision by Judge Patricia S. Curley.

In holding that Krier had standing to sue, the court relied heavily on two cases: Citizens State Bank v. Timm, Schmidt & Co., 113 Wis. 2d 376, 335 N.W.2d 361 (1983); and Chevron Chemical Co. v. Deloitte & Touche, 168 Wis. 2d 323, 483

N.W.2d 314 (Ct. App. 1992).

In Citizens State Bank, the Wisconsin Supreme Court held that an accountant’s liability for malpractice extends beyond the particular clients for whom the

accountant has worked and encompasses all parties who may have been damaged by the malpractice.

In Chevron Chemical Co., the court concluded that an account was liable for negligent misrepresentation to a client’s creditor that relied on an audit report.

Finding the relationships between Krier and the accountants in the case at bar to be even closer than in Citizen State Bank and Chevron Chemical Co., the court of appeals concluded that Krier had standing to bring suit against Virchow Krause.

Turning to damages, the court noted that Krier’s expert testified that his damages exceeded $11 million in lost profits, the incurring of unnecessary debt, and attorney fees. The court declined to address the damage calculations as beyond the scope of appeal, but remanded for trial.