Sufficiency of Evidence

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WI Court of Appeals – District IV

Case Name: Allsop Venture Partners III, et al., v. Murphy Desmond SC, et al.,

Case No.: 2020AP806

Officials: Blanchard, P.J., Fitzpatrick, and Graham, JJ.

Focus: Sufficiency of Evidence

Acting in consultation with tax advisors and attorneys, the large shareholders of a closely held corporation executed what amounted to a sale of the corporation. In an attempt to avoid taxes on that transaction, they used a so-called “midco transaction,” in which an intermediary or “middle company” facilitated the sale of the corporation’s stock and the (purportedly separate) transfer of a substantial portion of its assets to a third-party purchaser. But the Internal Revenue Service took the position, later upheld by the federal courts, that this was in substance not a stock sale separate from an asset sale but, instead, a single transaction: the direct sale of the corporate assets involving a sale of stock. See Shockley v. Commissioner, 872 F.3d 1235, 1245- 46, 1250-51, 1256 (11th Cir. 2017) (affirming IRS decision to disregard the midco transaction and assess taxes to transferees accordingly). As a result, large shareholders in the corporation, including corporation founders Terry Shockley and Sandy Shockley, were assessed significant tax liabilities as transferees under federal and state law. See id. at 1256.

In the wake of the imposition of these significant tax liabilities, investors in the corporation brought this action in Dane County Circuit Court. At issue in this action is the allocation of responsibility for causing the tax liabilities among the Shockleys, accountants, lawyers, and others. The Shockleys joined the action as intervening plaintiffs. Various parties settled out of the case, pursuant to a Pierringer release. By the time of trial, the remaining plaintiffs were the Shockleys and the remaining defendants were the law firm Murphy Desmond, an attorney of that firm, and the firm’s malpractice insurer. The jury returned verdicts resolving a range of issues regarding alleged negligence and intentional misrepresentations by various individuals and entities. This included jury findings that Terry Shockley and Murphy Desmond were negligent, but also that the defendants who had entered into pretrial settlements with the plaintiffs had committed intentional torts. The circuit court considered post-trial arguments and entered a decision and order granting Murphy Desmond’s motion for judgment on the verdict. This was based in part on the court’s conclusion that the causal negligence that the jury attributed to Murphy Desmond was fully satisfied through indemnity by operation of the Shockley’s pretrial Pierringer-release settlements with settling defendants, because the settling defendants were intentional tortfeasors.

The arguments of the Shockleys on appeal fall into three categories. The first two categories of arguments are that the circuit court erroneously exercised its discretion: (1) in making rulings related to evidence or argument regarding the existence of the pretrial Pierringer-release settlements and (2) in denying the Shockleys’ post-trial motions to change verdicts based on their claims that the verdicts were not supported by sufficient evidence. The third category of arguments is that the circuit court misapplied indemnity principles to determine that Sandy Shockley and Shockley Holdings are not entitled to any recovery in this case beyond what they received in the pretrial settlements. We affirm on all issues.

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Derek A Hawkins is Corporate Counsel, at Salesforce.