Ehlinger v. Hauser

PATIENCE DRAKE ROGGENSACK, J.

¶ 122. (concurring). I write in concurrence because I conclude that William Ehlinger (Ehlinger) and Jon Hauser (Hauser) had no binding buy-sell agreement in regard to valuing a shareholder's interest in Evald Moulding, Inc. (Evald). The proposed buy-sell agreement is irretrievably indefinite in that it does not define an essential term of the proposed agreement, i.e., on what basis Evald's assets and liabilities are to be valued in calcu*332lating book value. Accordingly, I conclude that the proposed buy-sell agreement is unenforceable.

¶ 123. I also write in concurrence because I conclude that the majority's theory that the proposed buy-sell agreement is unenforceable due to Hauser's failure to preserve sufficient corporate records to verify Evald's March 31, 2001 balance sheet rests on three unspoken assumptions, with which I am not in agreement. The first assumption is that the proposed buy-sell agreement between Ehlinger and Hauser intended Evald's March 31, 2001 balance sheet to be the basis for determining book value no matter on what basis that balance sheet's assets and liabilities were valued. The second assumption is that Hauser had an obligation to maintain documents sufficient to verify Evald's March 31, 2001 balance sheet. The third assumption is that having the documents that underlie Evald's March 31, 2001 balance sheet will cure any ambiguity or indefiniteness in the proposed buy-sell agreement. None of those assumptions is warranted. Accordingly, for the reasons set forth below, I respectfully concur.

I. BACKGROUND

¶ 124. The lengthy history of this case is ably set out in the majority opinion and need not be repeated here. Suffice it to say that on June 20, 2001, Hauser invoked the disability buyout provision of the proposed buy-sell agreement based on Ehlinger's disability. Because that agreement used the term "book value" as the measure for determining a shareholder's interest in Evald, Hauser calculated what he asserted was the book value of Evald at the relevant time, the end of Evald's fiscal year, March 31, 2001. Hauser offered Ehlinger $431,400 to purchase his stock in Evald.

*333¶ 125. Ehlinger agreed that Evald's book value was the measure for ascertaining the value of his stock, but he concluded that book value had been understated. Therefore, he refused Hauser's offer.

¶ 126. Ehlinger also asked that Evald's financial records be audited and the book value be determined based on that audit. Hauser refused, and because Hauser and Ehlinger are equal shareholders, no audit was done.

¶ 127. In the lawsuit that is now before us, Ehlinger asserted that Hauser had calculated book value on a tax basis, that the accounts receivable were undervalued and that all of the liabilities listed on the March 31, 2001 balance sheet were not valid obligations of Evald. Therefore, he asserted that the March 31, 2001 balance sheet could not be used to determine the true book value of Evald. He also asserted that he had not been provided with sufficient supporting documentation to fully review Hauser's determination of book value.

¶ 128. The circuit court appointed a special magistrate to determine whether book value could be calculated. However, the special magistrate concluded that he could not verify Evald's book value at fiscal year end because of the lack of supporting documentation. He explained that he could not verify Evald's physical inventory, accounts receivable and accounts payable, all of which were material to a determination of book value.

¶ 129. Thereafter, the circuit court determined that the proposed buy-sell agreement was hopelessly indefinite and therefore, unenforceable. Hauser appealed. After concluding that the proposed buy-sell agreement was ambiguous, not indefinite, the court of appeals affirmed the circuit court. Ehlinger v. Hauser & *334Evald Moulding, Inc., 2008 WI App 123, ¶ 31, 313 Wis. 2d 718, 758 N.W.2d 476.

¶ 130. The majority opinion concludes that the lack of documentation to verify the March 31, 2001 balance sheet makes it unnecessary to determine whether the circuit court was correct in determining that the proposed buy-sell agreement was indefinite or the court of appeals was correct in determining that the proposed agreement was ambiguous.1

II. DISCUSSION

A. Standard of Review

¶ 131. Whether an agreement2 is ambiguous is a question of law for our independent review. Moran v. Shern, 60 Wis. 2d 39, 46-47, 208 N.W.2d 348 (1973); Town of Neenah Sanitary Dist. No. 2 v. City of Neenah, 2002 WI App 155, ¶ 9, 256 Wis. 2d 296, 647 N.W.2d 913. We also decide as a question of law whether a proposed agreement is indefinite. See Gerruth Realty Co. v. Pire, 17 Wis. 2d 89, 94-95, 115 N.W.2d 557 (1962).

B. General Contract Principles

¶ 132. An agreement is ambiguous if it is capable of more than one reasonable interpretation. Mgmt. Computer Servs., Inc. v. Hawkins, Ash, Baptie & Co., 206 Wis. 2d 158, 177, 557 N.W.2d 67 (1996). An agreement is indefinite when an essential term of the agreement is so uncertain as to prevent the creation of an enforceable contract. Id. at 178. Determining that a *335contract is ambiguous or that it is indefinite has different consequences for the parties to a proposed contract.

¶ 133. If an alleged agreement is ambiguous, the law presumes that a binding contract has been made and a fact question arises as to what the parties meant by the ambiguous term at the time the agreement was made. Bank of Sun Prairie v. Opstein, 86 Wis. 2d 669, 674-76, 273 N.W.2d 279 (1979); Lemke v. Larsen Co., 35 Wis. 2d 427, 431-32, 151 N.W.2d 17 (1967). Additionally, when an agreement is ambiguous, the meaning of the agreement is not determined solely by the face of the agreement; extraneous evidence of the intent of the parties may also be considered. Patti v. W. Mach. Co., 72 Wis. 2d 348, 351, 241 N.W.2d 158 (1976). The parties to the agreement may testify about what they intended the ambiguous term to mean when they entered into the contract. Id. at 354-55. The trier-of-fact will then determine what the parties intended. Id.

¶ 134. On the other hand, if an alleged agreement is indefinite as to an essential term, no enforceable agreement has been made because the parties have not agreed to their particularized obligations. Shetney v. Shetney, 49 Wis. 2d 26, 38, 181 N.W.2d 516 (1970); 1 Corbin on Contracts § 95, at 394 (1963). The requirement that a contract's essential terms be definite stems from requiring mutual assent, or a "meeting of the minds," to create an enforceable agreement. 1 Corbin on Contracts § 4.13, at 634—37 (rev. ed. 1993).

¶ 135. As we have explained, an indefinite agreement is no agreement at all. Gerruth Realty, 17 Wis. 2d at 93. Stated otherwise, "the definiteness requirement is relevant to contract formation, not [contract] interpretation." Mgmt. Computer Servs., 206 Wis. 2d at 178.

¶ 136. An enforceable agreement is not created when an essential term is indefinite. Id. An essential *336term is definite when there is mutual assent as to its meaning by the parties to the agreement. Id. An objective standard is used to determine whether there has been mutual assent. Id. If an essential term of an agreement is indefinite, it renders the contract unenforceable and our analysis of the alleged agreement ends with that determination.

C. Proposed Buy-Sell Agreement

¶ 137. The circuit court held extensive hearings on the meaning of book value. At their conclusion, the court found that " '[b]ook value' could mean anything from simple adoption of the year end statement to an audited determination." Memorandum Decision 1 (Jefferson County Cir. Ct. Nov. 29, 2006). It also found that "[t]he parties' conduct is insufficient to give definite meaning to the vague term." Id. at 2. The circuit court then concluded that it must "grant[] Plaintiffs motion to declare 'book value' undeterminable." Id.

¶ 138. On review, we sustain a circuit court's findings of fact unless they are clearly erroneous. Phelps v. Physicians Ins. Co. of Wis., Inc., 2009 WI 74, ¶ 34, 319 Wis. 2d 1, 768 N.W.2d 615 (citing Steinbach v. Green Lake Sanitary Dist., 2006 WI 63, ¶ 10, 291 Wis. 2d 11, 715 N.W.2d 195). Whether an alleged contract is indefinite can be determined by the trier-of-fact or as a matter of law. Mgmt. Computer Servs., 206 Wis. 2d at 178. Here, according to the findings and conclusions of the circuit court, the indefiniteness of book value could not be made more certain by surrounding circumstances. See Gerruth Realty, 17 Wis. 2d at 92.

¶ 139. I conclude that the circuit court's findings are not clearly erroneous and that the proposed buy-sell agreement is incurably indefinite. First, there is noth*337ing in the record from which to ascertain the basis upon which the parties decided that book value was to be calculated, when the proposed agreement was signed.3 Yet, that is the relevant timeframe for establishing the meaning of book value. See Bank of Sun Prairie, 86 Wis. 2d at 674-76.

¶ 140. Second, while book value is generally accepted as the assets of a corporation less its liabilities, there is no universal method by which a corporation values its assets and liabilities. For example, assets could be valued on a cost basis, a tax basis, a fair market value basis or some other basis. The proposed buy-sell agreement is silent about valuation of Evald's assets and liabilities for purposes of a shareholder buyout. Book value, with no further instructions about what is to be included and on what basis valuation is to be made, is too amorphous a term to provide the definiteness necessary to create an enforceable agreement.

¶ 141. For example, in Gardner v. Gardner, 190 Wis. 2d 216, 527 N.W.2d 701 (Ct. App. 1994), the court of appeals upheld a settlement agreement because the wife was informed by separate counsel that there was a difference between book value and the fair market value of certain stock. Id. at 230-31. Therefore, she could not complain that her husband had not adequately disclosed a major asset in the estate, which was listed as book value. Id. In Wisconsin Department of Revenue v. River City Refuse Removal, Inc., 2007 WI 27, 299 Wis. 2d 561, 729 N.W.2d 396, we described a computation of book value as "subtracting the accumulated depreciation" from "the original purchase price" of assets, during a transfer of assets between a subsidiary and a parent company. Id., ¶ 8.

*338¶ 142. In Schumann v. Samuels, 31 Wis. 2d 373, 142 N.W.2d 777 (1966), the parties had a partnership agreement that addressed buyouts upon retirement. In regard to valuation, that agreement provided:

"[B]ooks shall be kept on... a cash receipts and disbursements method of accounting, with use of inventories. However, this result is to be achieved by making the daily entries on the accrual system and adjusting them on any valuation date to the cash receipts and disbursements method, with use of inventories."

Id. at 374.

¶ 143. Schumann decided to retire, and Samuels elected to purchase his interest under the above quoted provision of the partnership agreement. Id. at 375. We concluded that even though both parties agreed that Schumann's interest could be purchased for book value, the agreement was nevertheless unenforceable. Id. at 376-77. As we explained, "[t]here is no doubt that 'book value' can be almost anything that the parties to a contract clearly define it to be." Id. We then remarked that in Townsend v. La Crosse Trailer Corp., 254 Wis. 31, 35 N.W.2d 325 (1948), we said that book value was " 'the market value of the assets'" less the company's liabilities. Schumann, 31 Wis. 2d at 377 (quoting Townsend, 254 Wis. at 36). We then imposed Townsend's determination of book value on the parties. Id.

¶ 144. While we may have reached the correct result for the parties in Schumann, we cannot apply its reasoning here because Townsend did not decide that book value equaled "market value" of assets less the company's liabilities. Rather, Townsend was a discovery case in a pre-complaint filing posture where the plaintiff wanted to view a list of documents to determine whether he could file a complaint alleging that the balance sheet *339provided to him was fraudulently constructed. Townsend, 254 Wis. at 36-37. Suffice it to say that the definitions ascribed to book value and the methods used in calculating book value vary considerably from case to case.

¶ 145. Third, Hauser does not contend that the circuit court's finding, that book value under the buy-sell agreement could mean anything from simple adoption of a year end statement to an audited determination, is clearly erroneous. Instead, he argues that the circuit court "incorrectly diagnosed the problem as indefiniteness instead of ambiguity." Hauser's brief in chief, 17. The findings of the circuit court cannot be set aside by simply contending that the legal issue is whether the proposed agreement is ambiguous rather than indefinite.

¶ 146. I conclude that the proposed agreement is indefinite as a matter of law, irrespective of whether that conclusion is based on the circuit court's findings of fact or is simply derived from the face of the agreement. The circuit court's findings of fact are not clearly erroneous, and there is no explanation in the proposed agreement from which one can objectively determine the basis on which Evald's assets and liabilities are to be valued when calculating book value. Accordingly, I would affirm the court of appeals' affirmance of the circuit court, albeit on a different basis.

D. The Majority Opinion

¶ 147. The majority opinion concludes that it is not necessary to determine whether the proposed buy-sell agreement is ambiguous or indefinite.4 The majority opinion asserts:

*340Because Ehlinger cannot now validate any claimed "book value," the contract cannot be enforced regardless of how the term could be defined.5

¶ 148. The majority opinion concludes that Ehlinger had the right to inspect the documentation underlying the March 31, 2001 balance sheet.6 Based on this conclusion, the majority opinion then assumes, without so stating, that Hauser had an obligation to maintain documentation sufficient to verify the figures on Evald's balance sheet. Such an obligation could arise by contract for Hauser or perhaps by statute, if Evald had the obligation. See Kasten v. Doral Dental USA, LLC, 2007 WI 76, ¶ 5, 301 Wis. 2d 598, 733 N.W.2d 300. However, no party testified to an agreement that Hauser would permanently maintain supporting documentation for Evald's balance sheets and the proposed buy-sell agreement contains no such obligation.

¶ 149. Furthermore, no statute requires Evald to permanently maintain supporting documentation for its balance sheets.7 Wisconsin's business corporation law is contained in ch. 180. Wisconsin Stat. § 180.1602 addresses the inspection of corporate records by a shareholder. A shareholder who qualifies for the right to inspect corporate records under § 180.1602(2)(b)8 has a statutory right to inspect the corporation's bylaws under § 180.1602(lm) and three additional categories *341of records pursuant to § 180.1602(2)(a). Those categories of corporate records are:

1. Excerpts from any minutes or records that the corporation is required to keep as permanent records under s. 180.1601(1).9
2. Accounting records of the corporation.
3. The record of shareholders, except as provided in s. 180.1603(3).

§ 180.1602(2)(a). In regard to "accounting records" of a corporation, Wis. Stat. § 180.1601(2) provides that a "corporation shall maintain appropriate accounting records." However, nowhere in ch. 180 are "appropriate accounting records" defined.

¶ 150. In addition, there is no requirement that a corporation permanently maintain accounting records. Wisconsin Stat. § 180.1601(1) identifies those records that must be maintained permanently.10 The listing in § 180.1601(1) includes minutes, actions taken without a meeting and committee actions taken on behalf of the corporation. Accounting records are not among those corporate records that are required to be maintained permanently.

*342¶ 151. Chapter 180, Wisconsin's current business corporation law, was created by 1989 Wis. Act 303, § 13. The type of accounting records for which ch. 180 provides a shareholder's right of inspection has received little judicial scrutiny. However, prior to the enactment of 1989 Wis. Act 303, Wis. Stat. § 180.43(1) (1987-88) was the predecessor of Wis. Stat. § 180.1602(2). Section 180.43(1) (1987-88) provided in relevant part:

Each corporation shall keep correct and complete books and records of account and ... minutes of the proceedings of its shareholders and board of directors ... [and] a record of its shareholders ....

¶ 152. The court of appeals interpreted Wis. Stat. § 180.43(1)11 in Bitters v. Milcut, Inc., 117 Wis. 2d 48, 343 N.W.2d 418 (Ct. App. 1983). In Bitters, the court of appeals addressed a shareholder's request to inspect "interim corporate financial statements." Id. at 48. The circuit court in Bitters concluded that the interim financial statements were not within the scope of corporate documents to which a shareholder's right of inspection under § 180.43(1) applied. Id. at 49. In affirming the circuit court, the court of appeals concluded that a corporation's obligation to permit shareholder inspection of the "books and records of account . .. undoubtedly [is] one for an annual financial statement." Id. at 51.

¶ 153. Here, the majority opinion presumes that Evald had an obligation to maintain documentation underlying an annual financial statement, the March *34331, 2001 balance sheet.12 However, such an obligation does not arise under either the proposed buy-sell agreement or under a statute.

¶ 154. And finally, even if Evald had maintained the documentation underlying the March 31, 2001 balance sheet on which Hauser asserted that he calculated the book value of Evald, a court, nevertheless, could not calculate the book value of Evald. This is so because of the irretrievable indefiniteness inherent in the undefined, essential term "book value" in the proposed buy-sell agreement.

¶ 155. To explain further, book value may be based on different valuation methods and still be called "book value." The proposed buy-sell agreement gives no direction as to whether the assets were to be valued on a cost basis, a tax basis, a fair market value basis or some other basis when a shareholder is being bought out. Each choice would produce a different book value. Also, there is no indication of how the liabilities were to be valued. The documentation from which the March 31, 2001 balance sheet was constructed might indicate on what basis the March 31, 2001 balance sheet was stated, but it will not indicate whether the valuation basis used for the balance sheet comports with the term "book value" in the proposed buy-sell agreement. Accordingly, the missing, underlying records do not remove the necessity to analyze whether the proposed buy-sell agreement is indefinite or merely ambiguous.

III. CONCLUSION

¶ 156. I conclude that the parties had no binding buy-sell agreement in regard to valuing a shareholder's interest in Evald because the proposed buy-sell agree*344ment is irretrievably indefinite in that it does not define an essential term of the proposed agreement, i.e., on what basis Evald's assets and liabilities are to be valued in calculating book value. Accordingly, I conclude that the proposed buy-sell agreement is unenforceable.

¶ 157. I also conclude that the majority's theory that the proposed buy-sell agreement is unenforceable due to Hauser's failure to preserve sufficient corporate records to verify Evald's March 31, 2001 balance sheet rests on three unspoken assumptions, with which I am not in agreement. The first assumption is that the proposed buy-sell agreement between Ehlinger and Hauser intended Evald's March 31,2001 balance sheet to be the basis for determining book value no matter on what basis that balance sheet's assets and liabilities were valued. The second assumption is that Hauser had an obligation to maintain documents sufficient to verify Evald's March 31, 2001 balance sheet. The third assumption is that having the documents that underlie Evald's March 31, 2001 balance sheet will cure any ambiguity or indefiniteness in the proposed buy-sell agreement. None of those assumptions is warranted. Accordingly, for the reasons set forth above, I respectfully concur.

Majority op., ¶ 59.

I use agreement and contract interchangeably in this concurrence.

The proposed buy-sell agreement was signed on August 14, 1992.

Majority op., ¶ 3.

Id., ¶ 59.

Id., ¶¶ 3, 60.

It is important to point out that no four justices agree that Hauser or Evald had an obligation to retain supporting documentation for Evald's balance sheets.

There is no question that Ehlinger is a shareholder who qualifies for the statutory right to inspect the three categories of records listed in Wis. Stat. § 180.1602(2)(a).

Wisconsin Stat. § 180.1601(1) provides:

(1) A corporation shall keep as permanent records any of the following that has been prepared:
(a) Minutes of meetings of its shareholders and board of directors.
(b) Records of actions taken by the shareholders or board of directors without a meeting.
(c) Records of actions taken by a committee of the board of directors in place of the board of directors and on behalf of the corporation.

See supra note 9.

Bitters does not specify which version of Wis. Stat. § 180.43(1) it interpreted; however, the relevant text of the statute is the same as the above-quoted 1987-88 version. See Bitters v. Milcut, Inc., 117 Wis. 2d 48, 50 n.1, 343 N.W.2d 418 (Ct. App. 1983).

See majority op., ¶ 60.