BMO Harris Bank, N.A. v. European Motor Works
BMO Harris Bank, N.A. v. European Motor Works
Opinion of the Court
¶ 1.
This appeal concerns a claim for contribution by defendant-appellant Scott H. Smith (Smith) against defendant-respondent Gregory Kleyn-erman (Kleynerman) arising from debts owed by European Motor Works, LLC (EMW), a limited liability company in which Smith and Kleynerman each held a fifty percent interest. Smith appeals the trial court's grant of summary judgment in favor of Kleynerman and the subsequent dismissal of Smith's contribution claim. On appeal, Smith argues that the trial court erred in granting Kleynerman's motion for summary judgment and dismissing Smith's contribution claim because: (1) Smith paid more than his fair share of the amount paid to discharge Smith's and Kleyner-man's joint obligation to guaranty the debt of EMW; and (2) Kleynerman should be required to contribute to the attorney's fees Smith paid for EMW's defense.
Background
¶ 2. The basic facts are generally not in dispute. Smith and Kleynerman were each fifty percent shareholders in EMW. On July 31, 2010, EMW, through Smith and Kleynerman, executed a promissory note (the Note) in favor of M&I Marshall & Ilsley Bank (the Bank) in the amount of $379,093.42, plus interest (five percent plus prime, or ten percent plus prime in the event of default), payable in monthly interest-only installments beginning August 31, 2010, for a two-month period, followed by a final payment of unpaid principal and accrued interest due on October 31, 2010.
¶ 3. Smith and Kleynerman were each personally liable for EMW's obligation to the Bank pursuant to continuing guarantees executed on May 6, 2003, and commercial guarantees that Smith and Kleynerman signed on or around September 10, 2009, and July 31, 2009, respectively. Additionally, Smith had pledged various stocks and certificates of deposit as collateral, and both Smith and Kleynerman mortgaged real estate to secure EMW's obligations.
¶ 5. The Bank filed a complaint on March 17, 2011, asserting claims against EMW, Kleynerman, and Smith.
¶ 6. The Bank moved for summary judgment against Smith and EMW on June 11, 2012; however, it did not move for summary judgment against Kleyner-
¶ 7. The Bank's summary judgment motion asserted that as of May 31, 2012, the total amount due and owing, excluding attorney's fees and costs, was $444,232.13, and including attorney's fees and costs, the total outstanding amount as of that date was $470,714.22. Smith eventually settled with the Bank. Pursuant to the terms of Smith's settlement agreement, the Bank agreed to discharge Smith's personal guaranty and Smith agreed to forfeit personal property he had pledged as collateral to secure EMW's debt, including: (1) $93,681.47 in certificates of deposit; (2) $29,323.81 in BMO Financial Group stock; (3) $76,787.54 in FIS stock; and (4) a $40,000 lien on Smith's home in Eden Prairie, Minnesota. On October 9, 2014, the trial court signed an order entering judgment in favor of the Bank against Smith personally in the amount of $239,792.82 per the stipulation.
f 8. As it had done with Smith, the Bank eventually settled with Kleynerman on his personal guaranty for EMW's debt. Under the terms of that settlement, the Bank released Kleynerman from his personal guaranty for EMW's debt under the Note for a total payment of $10,000, consisting of two separate $5000 payments.
¶ 10. In the interim, the parties appeared for a scheduling conference on February 19, 2014, at which time the trial court granted Kleynerman's original counsel leave to withdraw, and Kleynerman's new counsel appeared on February 25, 2014. Six months later, on August 22, 2014, Kleynerman, who had yet to respond to the cross-claim for contribution Smith had filed almost three years earlier, filed a motion seeking enlargement of time to respond to Smith's cross-claim, as well as a brief opposing default judgment on the cross-claim. The trial court denied the enlargement of time and default motions on October 9, 2014. Smith thereafter filed an amended cross-claim for contribution against Kleynerman on October 20, 2014, alleging that Smith had paid more than his fair share—"in excess of $200,000"—to discharge their common liability, whereas Kleynerman paid only $10,000. Kleynerman filed an answer and affirmative defenses denying the allegations in Smith's amended cross-claim, and they ultimately filed cross-motions for summary judgment.
¶ 11. In his summary judgment motion, Kleyner-man argued that Smith was not entitled to contribution because Smith had not paid more than his fair share of EMW's debt, for which they were jointly and severally liable; that both were liable for half of EMW's debt because each held a fifty percent interest in EMW;
¶ 12. At the March 20, 2015 motion hearing on the cross-motions for summary judgment, the trial court, relying on its interpretation of Boutin v. Etsell, 110 Wis. 276, 86 N.W. 964 (1901), focused primarily on whether Kleynerman received a benefit from Smith's settlement with the Bank. The trial court ultimately concluded that Smith's settlement with the Bank had not conferred a benefit on Kleynerman, explaining that based on the evidence presented, it appeared that the
I think that the thing that's really gotten under Mr. Smith's skin and the thing that's the driving point of Mr. Smith's contribution claim is this supposed imbalance. And what Mr. Smith is asking me to do is balance what he paid against what Mr. Kleynerman paid.
But my hunch after listening to this for as long as I have is that that's not the correct comparison to make. Because that comparison depends on the principle that the Bank is only looking to get so much out of this and it doesn't matter where it gets it from — who it gets the amount of money from if it gets to that point, like 55.3 percent.
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I mean, to me what [the Bank] did was they tried to get as much out of Smith, they tried to get as much out of Kleynerman, and then they quit. But it's not like they said we need to get X, and it doesn't matter how much we get from one or the other. It seems to me, in fact, if they could have gotten more out of Mr. Smith, they would have, right?
Having concluded that Smith's settlement did not confer a benefit on Kleynerman, the trial court found that Smith was not entitled to contribution. In a written order dated March 20, 2015, the trial court granted Kleynerman's motion for summary judgment and dismissed Smith's cross-claim for contribution. This appeal follows.
Analysis
¶ 13. On appeal, Smith challenges the trial court's grant of summary judgment in favor of Kleyn-erman and dismissal of Smith's contribution claim. For the reasons that follow, we conclude that the trial court
I. Standard of Review.
¶ 14. Summary judgment is appropriate where there are no material facts in dispute and the moving party is entitled to judgment as a matter of law. See Wis. Stat. § 802.08(2) (2013-14).
¶ 15. Where, as here, the parties have filed cross-motions for summary judgment, it is generally the equivalent of a stipulation of facts permitting the trial court to determine the case on the legal issues presented. See Millen v. Thomas, 201 Wis. 2d 675, 682-83, 550 N.W.2d 134 (Ct. App. 1996).
¶ 16. Contribution "is a legal action to recover money paid to the use of the defendant, and stands upon the same footing as any other action founded upon an implied contract." Bushnell v. Bushnell, 77 Wis. 435, 438, 46 N.W. 442 (1890). A right to contribution may be based on an express contract, or, in the absence of an express contract, may "arise by operation of law to rectify an inequity resulting when a co-obligor pays more than a fair share of a common obligation." Kafka v. Pope, 194 Wis. 2d 234, 242, 533 N.W.2d 491 (1995). Where a claim for contribution is implied by law, the party seeking contribution must establish that: (1) the parties are liable for the same obligation; and (2) the party seeking contribution paid more than a fair share of the obligation. Id. at 242-43. We begin by addressing whether Smith and Kleynerman were liable for a common obligation.
A. Smith and Kleynerman are liable for the same obligation.
¶ 17. On appeal, Smith argues that he and Kleynerman are liable for the same obligation based on the guarantees that they each signed in relation to EMW's debt to the Bank under the Note. We agree.
¶ 18. When a party seeks contribution from a co-obligor based on an implied contract, we first determine whether the parties are liable for the same obligation. See id., 194 Wis. 2d at 243.
*669 [I]n determining a right of contribution, "it matters not, in a case of a debt, whether the sureties are jointly and severally bound, or only severally; or whether their suretyship arises under the same obligation or instrument, or under divers [e] obligations or instruments, if all the instruments are for the identical debt."
Id. (citation omitted; italics added). The reason the law implies a contract under such circumstances is because "both parties are liable for the same obligation and one has paid more than a fair share." Id. at 244-45. Whether the co-guarantors "signed one or two or more pieces of paper securing the same obligation is irrelevant." Id. at 245.
¶ 19. In Kafka, our supreme court addressed the question of "whether an action for contribution is available to a co-guarantor when that person has paid more than his fair share of a common obligation, even though the guaranties are evidenced by separate instruments." Id. at 236-37. There, Kafka was a majority shareholder and officer of Wisconsin Truck Center, Inc., and Pope was a minority shareholder and officer. Id. at 237. The corporation executed three promissory notes payable to M & I Northern Bank totaling $650,000, and both Kafka and Pope executed separate personal guarantees for the notes. Id. The personal guarantees were secured by mortgages on real property owned by Kafka and Pope. Id. Ultimately, the corporation was unable to meet its payments, and the bank foreclosed on two mortgages given by Kafka, the proceeds of which were applied to the principal amount the corporation owed on the notes. Id. At the time the bank filed its complaint, Kafka had paid $200,000 of his personal funds toward the amounts due on the notes while Pope had not paid anything. Id. at 237-38.
¶ 20. Pope sought summary judgment on Kafka's contribution claim, which the trial court granted. Id. at 239. The trial court concluded that Kafka and Pope were parties to separate contracts/guarantees with the bank, and therefore neither was entitled to seek contribution on the grounds of having paid more than his fair share. Id. Kafka appealed, and we reversed the trial court's ruling. Id. (citing Kafka v. Pope, 186 Wis. 2d 472, 521 N.W.2d 174 (Ct. App. 1994)). Our supreme court affirmed that decision, concluding that the trial court had erroneously granted summary judgment in favor of Pope prior to a trial on the merits. See Kafka, 194 Wis. 2d at 246. The supreme court reached its decision after concluding that so long as the instruments Kafka and Pope signed were for the identical debt, it was irrelevant whether Kafka and Pope were jointly and severally bound or only severally bound and that it was not necessary that both had signed the same instrument. Id. at 243. Having determined that Kafka was entitled to maintain the contribution action, it remanded the matter to the trial court to determine "the ultimate material question of fact as to whether [Kafka] paid more than his fair share of the common obligation." Id. at 246.
¶ 21. As in Kafka, Smith and Kleynerman both signed guarantees holding each of them personally liable for EMW's debts and obligations under the Note. Thus, because the guarantees Smith and Kleynerman signed secured the same debt—regardless of whether they signed the same document—they are liable for the same obligation. See id., 194 Wis. 2d at 243-44.
B. Smith did not pay more than his fair share of the obligation.
¶ 23. Where the party seeking contribution based on an implied contract establishes that the parties are liable for the same obligation, we look next to whether the party seeking contribution has paid more than his or her fair share of the obligation. Id. at
¶ 24. The crux of the parties' dispute on appeal is the appropriate method for determining whether one co-guarantor has paid more than his or her fair share of the obligation. Smith, arguing that he is "entitled to contribution from Kleynerman for the settlement payment" (capitalization omitted), asserts that the appropriate analysis looks to whether one party has paid more than his or her fair share of the total amount the parties paid to settle the matter. In other words, Smith argues that because the parties paid approximately $250,000 total to settle with the Bank and obtain personal releases on their respective guarantees, he is entitled to contribution because he paid nearly $240,000 of that amount.
¶ 25. We reach this determination based on our conclusion that neither Kafka nor any of the other Wisconsin case law the parties rely upon specifically addresses how to determine whether one party has paid more than his or her fair share in a scenario such as this where each party negotiated a settlement and release on his own behalf, for less than half the total amount owed on the Note, without also securing a release for the co-guarantor. Our own research has likewise failed to identify Wisconsin authority directly on point. Kleynerman, however, cites to foreign authority such as Falb v. Frankel, 73 A.D.2d 930 (N.Y. App. Div. 1980), Sacks v. Tavss, 375 S.E.2d 719 (Va. 1989), and Humphrey v. O'Connor, 940 P.2d 1015 (Colo. App. Ct. 1996), that supports his position. In light of the Kafka test, we find these, and other foreign cases, persuasive.
¶ 26. We first consider Thomas v. Jacobs, 751 A.2d 732 (R.I. 2000), a factually similar case to the one at hand, in which the Supreme Court of Rhode Island addressed the issue before us: "whether plaintiff is entitled to contribution from his co-guarantor when plaintiff has paid less than half the total amount owed and has secured a release in his name alone." See id. at 734. In Rhode Island, as in Wisconsin, "[t]he doctrine of equitable contribution is applied to prevent one of two or more guarantors from being obliged to pay more than his or her fair share of a common burden, or to prevent one guarantor from being unjustly enriched at the expense of another." See id.
¶ 27. In Thomas, the plaintiff (Thomas) and defendant (Jacobs) each owned fifty percent of Protech Leather Apparel, Inc. (Protech). Id. at 733. Protech borrowed one million dollars from the bank and
¶ 28. After the parties reached their respective settlement agreements with the bank, Thomas sought contribution from Jacobs, arguing that "he was entitled to contribution from [Jacobs] because [Thomas] had paid more than half the parties' combined settlement amount of $250,000." Id. at 734. The Supreme Court of Rhode Island disagreed, concluding that Thomas's argument—that the fair share calculation should be based on his and Jacobs' total settlement amount of $250,000—was "based on a faulty premise" because "[t]he total amount owed was in excess of $700,000-[Thomas's] share of which would amount to more than $350,000." Id. Thus, the court concluded that Thomas's "payment of $175,000 . . . was not more than the amount that [Thomas] legally was obligated to pay." Id. The court further noted that neither party, in settling with the bank and obtaining a release from liability, obtained a release for any other party. See id.
¶ 29. Similarly, the Minnesota appellate court recently explained in Kroona v. Dunbar, 868 N.W.2d 728 (Minn. Ct. App. 2015), that the fair share calculation looks to the amount of the outstanding obligation. See id. at 735-37. In Minnesota, as in Wisconsin, " 'Contribution requires, first, a common liability of two or more actors to the injured party, and second, payment by one of the actors of more than its fair share of the common liability.'" See id. at 733 (citation omitted).
¶ 30. In Kroona, a limited liability company with four owners purchased land using approximately $5.2 million secured by a loan agreement from the bank. Id. at 730-31. The owners "executed four separate but essentially identical limited guaranty agreements, in which each individual guarantor guaranteed [the LLC's] obligations under the loan agreement up to $1,575,000." Id. at 731 (footnote omitted). The LLC defaulted, and after a foreclosure sale, the remaining indebtedness to the bank was $1,547,608.15. Id. Some of the guarantors settled with the bank and paid a total of $150,000 in exchange for their releases from liability. Id. Later, the bank took judgment in the amount of $1,547,608.15 against the guarantors who had not been part of the $150,000 settlement and release. Id. at 731-32. After the $1,547,608.15 judgment was entered, the respondent settled with the bank for $400,000 and thereafter sought contribution from the other co-guarantors. Id. at 732.
¶ 32. As can be seen from Thomas and Kroona, where co-guarantors are liable for the same obligation and one party seeks contribution based on the argument that he or she has paid more than his or her fair share of the common obligation, courts in other jurisdictions have rejected the argument Smith presents here and have instead concluded that the fair share calculation is based on the total amount of the outstanding obligation. See Thomas, 751 A.2d at 734, and Kroona, 868 N.W.2d at 736-37; see also Falb, 73 A.D.2d at 931 ("[a] part payment which does not exceed a surety's pro rata share of the indebtedness does not
¶ 33. We find the conclusions in these foreign cases convincing. First, the requirements for contribution in the cited jurisdictions—a shared common liability and a co-guarantor's payment of more than his or her fair share of the common liability—are the same requirements set forth in Kafka. Second, as in this case, the cited foreign cases either addressed scenarios in which the party seeking contribution argued, as Smith does here, that the "fair share" calculation should be based upon the total settlement amount rather than the total outstanding indebtedness, or addressed scenarios where, as here, the co-guarantors negotiated separate settlements with the creditor for less than half of the outstanding total debt and obtained personal releases for himself only. For those reasons, we likewise conclude that where two or more parties are liable for the same obligation and each party obtains a settlement and release only on his or her own behalf, the fair share calculation is based on the total amount of the outstanding obligation.
¶ 35. We need devote little time to this issue, as we readily conclude that "fair share" means equitable or proportionate. First, Black's Law Dictionary defines the word "fair" as meaning, among other things, "just" and "equitable." Fair, Black's Law Dictionary (10th ed. 2010). Second, in Michel v. McKenna, 199 Wis. 608, 614, 227 N.W. 396 (1929), our supreme court stated that "[i]t is only when joint tort-feasors 'have been subjected to an established common liability, and one has paid more than his equitable share of such common obligation, that the right to contribution arises.' " Id. at 614 (citation omitted; italics added). Although the court was referring to contribution in the context of joint tortfeasors, we see no reason that the language referring to an "equitable share" should not apply here. Accordingly, a party has paid more than his or her fair share under Kafka when he or she has paid more than an equitable or proportionate share.
¶ 37. Based on the foregoing, we affirm that portion of the trial court's grant of Kleynerman's summary judgment motion as it relates to Smith's claim for contribution on the amount paid to settle the matter with the Bank, albeit on different grounds. See International Flavors & Fragrances, Inc. v. Valley Forge Ins. Co., 2007 WI App 187, ¶ 23, 304 Wis. 2d 732, 738 N.W.2d 159 (appellate court may affirm summary judgment on different grounds than those relied on by the trial court).
III. The trial court erred in dismissing Smith's contribution claim as it relates to attorney's fees.
¶ 38. Our conclusion that Smith is not entitled to contribution on the amount paid to settle with the
¶ 39. The trial court's discussion of the attorney's fees aspect of Smith's contribution claim was cursory at best, and to the extent the trial court even considered the matter, it focused on whether Kleynerman had personally received a benefit as a result of Smith's personal representation. Smith's argument, however, is not that he is entitled to contribution for attorney's fees Smith paid on his own behalf; rather, Smith argues he is entitled to contribution from Kleynerman for attorney's fees Smith paid on behalf of EMW in this matter. Because the trial court failed to properly consider this question, and because the parties fail to direct our attention to anything in the record related to the attorney's fees issue—such as the amount of fees Smith paid on behalf of EMW, the amount or type of work EMW's attorney performed on its behalf, or whether there was any type of agreement between Smith and Kleynerman, for example—we conclude that reversal is appropriate as to this aspect of Smith's contribution claim.
¶ 40. In light of the parties' arguments on appeal, we briefly address the test the trial court is to apply on remand. Smith argues he is entitled to contribution from Kleynerman for attorney's fees he paid on behalf of EMW based on Boutin. There, the court concluded a group of sureties (the plaintiffs)
¶ 41. We conclude that Smith's reliance on Bou-tin is misplaced, as that case is distinguishable. Under Boutin, a co-guarantor may seek contribution for reasonable attorney's fees and expenses "incurred for the common benefit of the sureties." Id., 110 Wis. at 280. The facts of this case differ, however, because Smith seeks contribution for attorney's fees and expenses he paid out of his own pocket on behalf of EMW, whereas the Boutin plaintiffs sought contribution for attorney's fees they paid on behalf of the group of sureties. See id. at 279-80.
¶ 42. We likewise conclude that Kleynerman's reliance on Wis. Stat. § 183.0502(1) is misplaced. Section 183.0502(1) states: "An obligation of a member to provide cash or property or to perform services as a contribution to a limited liability company is not enforceable unless specified in a writing signed by the member." (Italics added.) Here, it is Smith—not the limited liability company—who is seeking contribution for attorney's fees and expenses that Smith paid on behalf of EMW. Section 183.0502(1) requires only that a member's obligation to provide funds to the limited liability company be in writing. See id. We are there
¶ 43. Accordingly, on remand, the trial court is to conduct further proceedings to determine whether, based on the Kafka test, either party is entitled to summary judgment on Smith's claim for contribution for attorney's fees Smith paid solely on behalf of EMW.
By the Court.—Order affirmed in part; reversed in part and cause remanded with directions.
Smith also identifies a third issue on appeal: whether the trial court erred when it decided the issue of contribution based upon a third party's motivations in collecting the underlying debt. Because we conclude that Smith is not entitled to contribution for the amount he paid to settle the obligation because he did not pay more than his fair share, we do not directly address this issue.
During the pendency of this case, BMO Harris Bank, N.A., purchased M&I Marshall & Ilsley Bank, and the case caption was amended to reflect the change. Our references to "the Bank" refer to the two banks interchangeably unless otherwise specified.
The complaint also listed Gigi Chan, Smith's wife, as a defendant. However, in his answer, Smith affirmatively alleged that Gigi Chan had passed away.
It is not clear from the record when Kleynerman's bankruptcy action was resolved; however, Smith, citing documents without reference to their location in the record, indicates that Kleynerman's bankruptcy was dismissed on or around March 27, 2013.
Kleynerman's calculation is based on the sum of the judgment the Bank took against EMW, Smith's settlement payment (exclusive of the $40,000 lien Smith allowed the Bank to take on his home), and Kleynerman's settlement payment. The parties dispute whether the $40,000 lien Smith allowed the Bank to take on his home should be included in calculating Smith's total settlement payment; however, for purposes of this appeal, it is unnecessary for us to resolve this question.
October 9, 2014, is the date the trial court entered judgment in favor of the Bank and against Smith and EMW.
All references to the Wisconsin Statutes are to the 2013-14 version unless otherwise noted.
As best we can tell, the trial court looked at the two settlement agreements Smith and Kleynerman each made separately with the Bank—rather than the underlying debt—as the "obligation" for the purpose of this analysis. This was error.
Essentially, the trial court looked to whether Kleyner-man received a benefit from Smith having settled with the Bank, e.g., whether the Bank was willing to accept less from Kleynerman because of the amount it had received from settling with Smith.
The $240,000 includes the $40,000 lien on Smith's home.
The court remanded the matter to the trial court to determine the proper number of co-guarantors to include in the fair share calculation, as there remained a question of fact regarding the solvency of some of the co-guarantors. See Kroona v. Dunbar, 868 N.W.2d 728, 736-37 (Minn. Ct. App. 2015).
In a footnote, the Supreme Court of Rhode Island recognized an exception that allows a co-guarantor to seek
Case-law data current through December 31, 2025. Source: CourtListener bulk data.