Wisconsin Supreme Court rules former shareholder cannot sue.

• Author: Ziemer, David

Byline: David Ziemer

Third parties lack standing to sue an accountant unless it was reasonably foreseeable that they would rely on the accountant's reports.

The June 10 opinion from the Wisconsin Supreme Court also clarifies when shareholders should bring derivative or direct actions.

Henry J. Krier and Michael Vilione were business partners whose operations were divided between three corporations -- EOG Disposal; EOG Environmental; and Vil-Kri Invest-ments.

Michael's brother, Donald Vilione, who works at Virchow Krause & Company, was the accountant for the three corporations.

Krier alleged that Michael Vilione misappropriated more than $1.2 million from EOG Environmental and $7,000 from EOG Disposal, and a settlement was reached in 2003.

Under the settlement, Krier became the sole owner of EOG Disposal and Vil-Kri, and Michael became the sole owner of EOG Environmental. However, they continued to do business together for the next two years.

In 2005, Krier brought suit against Donald Vilione, alleging a variety of theories, but claiming in short, that Vilione was either negligent in failing to discover the misappropriations, knew but failed to prevent them, or assisted in them.

The circuit court granted summary judgment in favor of Vilione, concluding that the suit could go forward only on the $7,000 allegedly embezzled from EOG Disposal, but the Court of Appeals reversed in a published opinion. Krier v. Vilione, 2007 WI App 235, 306 Wis.2d 147, 742 N.W.2d 537.

Separate Corporations

The Supreme Court reversed in an opinion by Justice Annette Kingsland Ziegler, concluding that permitting suit would be inconsistent with traditional corporate law principles.

The court rejected the argument that the three corporations were so closely intertwined that the corporate formalities could be ignored.

Ziegler wrote, The plaintiffs cannot pick and choose when they would like to operate separately and when they would like to operate as one corporation. Their business's interdependence does not blur the entities' distinct corporate structures.

Whatever damages Donald caused, the court concluded, those damages were to EOG Environmental, and only EOG Environmental or its shareholders could make a claim against him. Because Krier is no longer a shareholder, the court held he lacks standing.

The court also noted that, even if Krier were still a shareholder, his standing would be limited to the form of a derivative action, rather than a direct action.

Thus, if...