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Civil Procedure – corporate debt

By: WISCONSIN LAW JOURNAL STAFF//July 3, 2013//

Civil Procedure – corporate debt

By: WISCONSIN LAW JOURNAL STAFF//July 3, 2013//

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Wisconsin Supreme Court

Civil Digest

Civil Procedure – corporate debt

Individual guarantors of corporate debt lack standing to raise derivative counterclaims against the creditor.

“The court of appeals analogized the present case to Mid-State Fertilizer Co. v. Exchange Nat’l Bank of Chicago, 877 F.2d 1333 (7th Cir. 1989).  It found Mid-State’s rationale persuasive, and we likewise agree that it is persuasive.”

“In Mid-State, a bank loaned money to a corporation and also obtained guaranties from the corporation’s sole shareholders, Lasley and Maxine Kimmel.  Id. at 1334.  The corporation proceeded to lose money.  Id.  When the bank stopped making additional advances to the corporation, the corporation was unable to secure additional financing and was liquidated in bankruptcy.  Id.  The corporation and the Kimmels commenced an action against the bank, alleging several claims which included violations of federal banking laws and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).  Id.”

“The Mid-State court recognized that there are ‘good reasons . . . for the enduring distinction between direct and derivative injury,’ even when applied to guarantors.  Id. at 1335.  To avoid ‘double counting,’ courts must either attempt to apportion the recovery according to who bears the effects, or insist that the corporation recover and allow creditors, shareholders, officers, and all others involved in the corporate venture to ‘share any recovery according to the same rules that govern all receipts.’  Id. at 1336.  Divvying up the recovery ‘would be a nightmare,’ and is an unnecessary task when ‘recovery by the firm handles everything automatically.’  Id.  Additionally, requiring shareholder derivative actions prevents ‘efforts to divert the debtor’s assets-to pay off one set of creditors . . . while keeping the proceeds out of the hands of the firm’s other creditors.’  Id.”

Affirmed.

2010AP3158 Park Bank v. Westburg

Bradley, J.

Attorneys: For Appellant: Sostarich, Mark E., Elkhorn; For Respondent: Fenzel, Joseph E., Milwaukee; Hopkins, Michael T., Milwaukee

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