Posted on 01/03/2009 6:07:27 PM PST by Diana in Wisconsin
A case before the Wisconsin Supreme Court could have a major impact on the power of corporations and their relationships with unions, banks and vendors.
The court will decide whether owners can make business decisions for their personal benefit at the expense of creditors, workers and the corporations themselves or whether they have obligations to those interests. Oral arguments are set for Jan. 7.
The case involves the former owners of a company in Lancaster, Wis., about 80 miles west of Madison, that manufactures components for stereo speakers. The company, then known as Communications Products Corp., defaulted on loans in 2003 and went into receivership owing more than $1 million to a bank and local businesses.
The owners -- Daniel Virnich and Jack Moores -- received more than $10 million from the company over a 14-year period through salaries, management fees, cash withdrawals and by charging excessive rates for leasing it equipment. Neither ran its day-to-day operations.
Their payments continued in the final years even as the company struggled to pay bills, took out more debt and could not competitively price its product. Dozens of workers lost their jobs and the company refused to pay employee bonuses required in its union contract.
Acting at the request of the bank, a judge declared the company insolvent in 2003 and appointed a receiver to manage it. The receiver filed suit against Virnich and Moores on behalf of the company, alleging they breached their fiduciary duties by taking excessive compensation and engaging in self-dealing.
Virnich and Moores argued they could not be sued by the company they owned because they were its only shareholders and were free to manage it for their benefit. They said they approved and disclosed the payments and transactions that were at issue and courts should not be allowed to second-guess their decisions.
A judge rejected that argument and a jury in 2006 ordered Virnich and Moores to pay $6.5 million in damages. They appealed the verdict, which the bank is ready to collect by trying to seize Virnich's $2 million Colorado mansion and other assets.
An appeals court sent the case straight to the Supreme Court because of its statewide significance and conflicting previous decisions.
Wisconsin Manufacturers & Commerce, the powerful business lobby, told the appeals court last year that ruling against the owners would have a chilling impact on business. The case could allow the courts to interfere with business decisions and deter investors by allowing creditors to go after their personal assets when businesses fail, WMC warned.
Its brief called the compensation and leasing transactions by Virnich and Moores reasonable and common.
"This is not about some bad actors using a company for concealment or fraud to gain some advantage," it warned. "Rather, this case is about a good corporate citizen acting pursuant to sound business judgment and long-standing principles of corporate governance to maximize the benefits of the legal processes."
However, WMC decided to sit out the case once it reached the Supreme Court, a spokesman said. WMC has spent millions to help elect two conservative-leaning justices, Annette Ziegler and Michael Gableman, in recent years but has faced a backlash for negative campaign tactics.
Meanwhile, the Wisconsin Bankers Association and a union that represents workers at the company have urged the court to uphold the jury's award.
If the owners win this case, banks could no longer assume that corporations have any obligation to repay their loans, the bankers association warned. Banks would be forced to increase their oversight of loans, requiring personal guarantees and more frequent independent audits to protect their money, its friend-of-the-court brief said.
"It will significantly raise the costs of lending, and therefore of doing business, to the benefit of no one except perhaps the independent auditors and those insiders who wish to engage in inappropriate insider activities," association lawyer John Knight wrote.
William Haus, a lawyer for Sheet Metal Workers Local Union 565, said the company's workers suffered at the owners' expense by getting lower wages and benefits than they should have.
Giving owners the power to enrich themselves at the expense of the company would weaken collective bargaining agreements and companies' duties to meet their obligations, he said.
The company, which is now called Loudspeaker Components LLC and operating under different owners, has for decades been one of the larger private employers in Grant County. Vice President Brian Haas said he felt the previous owners had been unfairly portrayed as greedy and the lawsuit is "a dark cloud that keeps hanging over this business."
"Not a lot has really changed here," he said. "We worked hard to repair this company and I think we've done a good job with that."
Well, Duh. If you're STUPID enough to unionize your shop in the FIRST place, then you refuse to pay the extortion money, of course you're going to be sued! ;)
Here's the Money Quote, Kids! This is how it works in a LIBERAL state:
"WMC (WI Manufacturers and Commerce; i.e. BUSINESS) has spent millions to help elect two (EVIL) conservative-leaning justices [to the WI Supreme Court], Annette Ziegler and Michael Gableman, in recent years but has faced a backlash for negative campaign tactics."
As a small business owner, and the wife of a small business owner: D@mn SKIPPY we're going to 'enrich' ourselves through our own business! Why take a RISK if you're not going to gain something?
Stupid Liberals. Try working for yourselves someday instead of grifting off of others! Grrrrrrr!
Hard to believe the court has not already decided that you can’t run a company like this.
These owners defrauded their investors and did not live up to their contractual agreements. They should be in jail.
Corporate statutes have always been a “get out of jail” card.
Excuse me...these people defrauded a bank...they took on debt and did not repay it...they knew the company would fail. They should be in jail. If business owners continue to behave in this sort of fashion, there will be new laws...where God’s law and morality fail...man must step in. This is not about a guy who made money, and the government is trying to take it away, these guys are criminals.
Yeah, I don’t think there is any state that will allow the owners of a business to loot the company while they are not paying creditors. Certainly the bankruptcy code does not.
You know I love you Diana and hope any business you are in makes lots of money...I know you would never behave in such a despicable fashion. It’s a shame that bad actors like these people ruin it for decent people like you...innocent people who would never break the law must live with the legacy of those who are basically criminals.
Re-read the story. The company WAS being run for the benefit of the investors. " they were its only shareholders "
I thought personal assets were off limits wrt a corporate lawsuit?
Exactly right...Wachovia basically got away with this...because of the bailouts, but had they been forced into bankruptcy...the former CEO would have soon parted with his millions and possibly faced criminal prosecution.
They raided the company and defrauded their creditors.
I would agree with you except for the part about how they took on debt...they defrauded the bank and should go to jail.
‘If the owners win this case, banks could no longer assume that corporations have any obligation to repay their loans, the bankers association warned. Banks would be forced to increase their oversight of loans, requiring personal guarantees and more frequent independent audits to protect their money, its friend-of-the-court brief said.’
Small business would be really hurt because banks would never lend under these circumstances...You can take any profit out of a company you own...provided you meet your obligations to banks and yes even unions if you signed on the dotted line.
‘Virnich and Moores argued they could not be sued by the company they owned because they were its only shareholders and were free to manage it for their benefit. They said they approved and disclosed the payments and transactions that were at issue and courts should not be allowed to second-guess their decisions.’
These guys must be kidding...how would anyone ever be able to trust any business if they win...banks, employees, investors?
Right—a corporation is only so if it is treated as such by the principles.
Oh, God forbid! What a grave injustice!
-ccm
These two guys were the sole owners. Once it went into receivership, they were off the hook. The Union wants their personal assets, which, by LAW, should be untouchable. They were no longer “in charge” of the business; the business is it’s own “entity” with it’s own assets. If a bank gives a “company” money and that “company” doesn’t have the assets to cover it, the bank eats it. Their loss...which, of course, they can write off. :)
This article really isn’t 100% clear.
This business was an LLC with two owners, and you can’t take the PERSONAL assets of those that own an LLC; only the assets of the business.
But, yes. They were LESS than stellar citizens in conducting their business affairs. But to me, they seem to be within the law. (Their BIG mistake was unionizing, which was most likely running them into the ground anyway; just a hunch.)
And, having just gone through this ourselves (dissolving a business with a less-than-honest partner who stuck us with about $40K in bills not of our own making) we were darn HAPPY to have set it all up as an LLC from the start. If we hadn’t of been able to cover those bills, would our other assets (home, investments, cars, etc., and believe me, we don’t have much!!) have been protected from someone that wanted to take advantage of us, or basically screwed OUR business into the ground?
If they change the law, no one is protected, no one will start businesses that employ others, and Wisconsin will sink further into the muck of Liberalism and government control of everything.
(I’ll NEVER have an “employee” and neither will Husband. We’ll work 24/7 for years on end to get the job done ourselves than to put up with MORE Government interference.
And...Love you back, LOL! :)
Read post #20. As usual, you misunderstand me, and nearly every other Conservative on this site. (I know you’re new. I’m not bringing the hammer down...yet, LOL!)
Try to see the BIG picture for a change.
I don’t like it. And I will fight against it.
In times of financial stress it is expected that the business owners will be vilified for acting in their own best interests. The bank should have known better than to loan without security. That's just plain bad business on their part. When the Union showed up, they should have closed the shop and reopened with a new name in a different location and with different employees. That would have been good business on the part of the owners.
I definitely will put Wisconsin on my list of places not to start a business in. Thanks for the post.
Now as for the bank, it should eat its loss. Most banks will not lend to narrowly held corporations without personal guarantees for just this reason.
Diana-if I were the bank, I would have filed fraud charges against these guys...I can’t feel sorry for them and hope the court rules in a way that makes these bozos pay while not hurting small business. No small business will get loans if people do stuff like this...if it isn’t against the law, it should be. I hope every business owner makes a profit, but not by milking a corporation and leaving the bank holding the bag. Love you back!
And I'll go one farther. We're going to get some kind of government run healthcare because the republicans didn't police the insurance companies when they had the chance a few years ago. People have been calling for fairness for years.
No, we haven’t talked about THIS particular issue. I do have a good grasp of what Liberals can DO to a perfectly good state like Wisconsin, having grown up here and making it my home of 40+ years. I’ve SEEN the creeping incremental ways of Socialism, and it ain’t pretty.
This lawsuit will be just another nail in the coffin of Wisconsin.
This sort of behavior makes people believe that capitalism does not work...these guys are disgusting.
Yep. I know how to pick ‘em, don’t I? LOL! :)
I hope not...I really like Wisconsin. I live their for only a year, but great schools and nice people.
I heard a few details about the health care initiative...it’s not good. You are right. We left health care to long. Too many companies under global pressure could not provide benefits and too many insurance companies acted badly.
Many banks and credit cards require a personal guaranty from a business officer or owner before they will extend credit to a business. Sign the guaranty and all your personal assets come in to play and removes the corporate shield......regards - red
“Right—a corporation is only so if it is treated as such by the principles.”
Not really, the corporate is a separate legal entity regardless of how the owners treat it.
They deserved to be sued for breaking contracts but all this anti-business talk is nonsense.
I’ve always wondered how a rich guy like Donald Trumph could own a company that went bankrupt, and still be rich. I guess this explains it.
I meant to say it sucks about the 40k also. I would agree about the bank...but the assets were probably there when the loan was made...these bozos raided the company and confiscated the assets. They made millions so this company had money at one time...I just don’t see how this is right.
I don’t in the least BIT feel sorry for them. If the courts find that they were wrong, so be it. However, they DO get to appeal it one more time. Shall we do away with taking our cases to the WISC? Nope.
However, if the laws about separating personal and business assets ARE changed due to this case, then NO ONE in their right mind is EVER going to start a business in this state ever again. And banks won’t be lending anyone cash to start a business in the first place.
Businesses fail for any number of reasons. Fraud (embezzlement, as in our case) by employees and employee theft being, like Number One in very many instances.
Plain and simple: These guys protected their assets by filing for receivership. They were within the law as it currently stands. They were smart enough to set their company up within the law so as to BE protected if their business took a nosedive for whatever reason. If one of the partners had been disabled in an accident of some sort, and THAT caused the downfall of the business, would that be easier to swallow? Should we now seize the assets of a disabled man to pay the back union dues? Ha-rumph! ;)
I don’t think people are seeing the Big Picture, here. Businesses fail for many reasons. Should people be thrown into the Poor House, having personal assets taken from them, because they tried and failed? Because a legal, separate entity, “The Business,” failed?
Oh, yeah. There will be fireworks over this one, whichever way it goes. Love you back! :)
It does. I’m not rich, but I could’ve lost it all due to someone embezzling (STEALING!!) $40K from our business.
Trust me, I’m no Trump, and I’ll never be a CHUMP again, either.
BUT...if this case changes the laws and allows the courts to take personal assets when a business entity fails, we’re all screwed.
I've paid insurance for 25 years, and I needed it two years ago. Of course, now that I have a pre-existing condition, we will be slave laborers until I can get on Medicare.
We did everything right, and we're still screwed, and my story isn't unusual. It's extremely common, in fact.
At this point (and I'm going to get blasted for this), I'm at the point where I'd rather be denied treatment by some paper-pushing bureaucrat than some insurance company trying to make record profits.
And I happen to be very pro-business, but ENOUGH IS ENOUGH.
And as an fyi - my cancer was caught early and my treatment was very routine. I suffered more anxiety over the unpaid bills than over the cancer.
Pathetic, huh?
It could also be a case about fraud - it is generally considered a crime to run a company while knowing that your actions will lead to direct losses to suppliers, lenders, etc...
“I just don’t see how this is right.”
Just sleep on it. I will, too. Goodnight! :)
Defaulting on a loan is not necessarily fraud unless that was the purpose of obtaining the loan. The bankers need to get off their back sides and become a little better acquainted with the businesses they're handing money.
Good night...sleep tight with an electric blanket. I hear it’s cold in WI tonight!.
I agree...it’s got to be fraud with the loans taken after the company was in trouble.
Hard to believe a bank would loan money to a company run this way!
While it’s obvious these two scum-bags drove their own company into the ground by draining it dry, the whole point of “incorporating” is to provide a wall of separation between your business dealings and your personal finances.
This wall would be demolished if the high court rules against the scum-bags.
I looked at buying some apt bldgs in Madison WI. a couple years ago. Then I learned you're not allowed to run credit reports on prospective tenants and you are not allowed to require annual leases.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.