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Case Study

Schaefer v. Orth

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Court of Appeals of Wisconsin, 2018 WI App 35, 382 Wis.2d 271, 915 N.W.2d 730 (2018).

BACKGROUND AND FACTS Jason Schaefer and Randy Orth created Grilled Cheese, LLC, to own and operate a “Tom and Chee” franchise, a casual restaurant specializing in grilled cheese sandwiches and soups. The operating agreement provided that Schaefer would be responsible for the restaurant’s day-to-day operations, for which the LLC would pay him a monthly salary and bonuses. Orth would be responsible for the LLC’s business and financial decisions and would not receive any compensation.

The restaurant reported a profit only in its first full month of operations. Five months later, when Schaefer was not paid his salary and bonuses, he quit. Later, Orth closed the restaurant and worked to wind up the business. Both parties lost the entire amounts they had invested in the LLC. Schaefer filed a suit in a Wisconsin state court against Orth, claiming Orth had breached their contract by failing to pay Schaefer’s salary. The court directed a verdict in Orth’s favor. Schaefer appealed.

In the Language of the Court

PER CURIAM [By the Whole Court].

The [lower] court granted Orth’s motion for a directed verdict because it determined there was no credible evidence to support a conclusion that Orth was personally liable to Schaefer for the unpaid wages and bonuses to which Schaefer was entitled under the operating agreement.

At trial, both Orth and Schaefer testified it was the LLC’s responsibility to pay Schaefer the wages and bonuses set forth in the operating agreement, and Orth was not personally required to pay Schaefer those amounts.

The operating agreement’s unambiguous language confirms that the LLC, not Orth, was responsible for paying Schaefer’s wages and bonuses. The section of the agreement pertaining to “Distributions” specifically lists Schaefer’s wages and bonuses as distributions to be paid to Schaefer before other distributions to the LLC’s members. The agreement specifies that distributions are made from the LLC’s available funds. The section of the agreement pertaining to “Profits” similarly states that, in the case of any profit resulting from the LLC’s operations, “the LLC shall, as the first priority, allocate Profit to Schaefer to the extent, if any, that (A) all service compensation accruing in his favor through the date of the relevant allocation, exceeds (B) all prior allocations under this Clause.” The agreement defines the term profit as the LLC’s profit.

The language cited above plainly demonstrates that the LLC was responsible for paying Schaefer’s wages and bonuses. Wisconsin’s LLC statutes provide that “the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company.” With certain exceptions not applicable here, “a member or manager of a limited liability company is not personally liable for any debt, obligation or liability of the limited liability company, except that a member or manager may become personally liable by his or her acts or conduct other than as a member or manager.” There is no evidence Orth was acting outside his capacity as a member or manager of the LLC when he failed to pay Schaefer’s wages and bonuses. As a result, Orth is not personally liable to Schaefer for the payment of those amounts. [Emphasis added.]

Case Heading or citation

1.      Issue of law:  Explain what legal issue the court had to determine

2.      Facts:  Explain what happened but not analysis

3.      Holding:  A short statement of how the court resolved the issue

4.      Law:  Define the rules of law that were used to decided the issue

5.      Explanation:  The legal reasoning of why the court decided what it did

6.      Judgment:  The order of the court to the parties or lower court

7.      Opinion:  Share your opinion on the fairness or correctness of the decision

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