Chapes v. Pro-Pac Inc

Filing 8

ORDER signed by Judge J P Stadtmueller on 5/30/12 as follows: AFFIRMING the bankruptcy court's memorandum decision that the appellant breached his fiduciary duty to Pro-Pac; AFFIRMING the bankruptcy court's memorandum decision awarding $50,000.00 in punitive damages against appellant George Chapes III for his intentional disregard for Pro-Pacs rights; and DISMISSING this appeal. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
GEORGES CHAPES, III,
Appellant,
v.

Case No. 11-CV-1076-JPS

PRO-PAC, INC.,
Appellee.

ORDER

On November 22, 2011, appellant Georges Chapes (“Chapes”)
appealed a decision by the United States Bankruptcy Court for the Eastern
District of Wisconsin (“bankruptcy court”) ruling that Chapes, a former
employee of appellee Pro-Pac, Inc. (“Pro-Pac”), breached his fiduciary duty
to Pro-Pac by steering a business opportunity – known as the “Vangard deal”
– to one of its competitors, WOW Logistics Company (“WOW”). Chapes
raises two issues on appeal: (1) whether the bankruptcy court erred in
finding that Chapes breached a fiduciary duty to Pro-Pac; and (2) whether
the bankruptcy court erred in awarding punitive damages against Chapes.
The court affirms the decision of the bankruptcy court in both respects.
1.

Background
The facts on appeal are largely undisputed and are taken from the

bankruptcy court’s memorandum decision. Linda Sarna and David Sarna
incorporated Pro-Pac in 1999 as a packaging business. Eventually, they
desired to expand and diversify the business to include warehousing and
transportation business lines. In furtherance of this goal, in June of 2005, ProPac hired Chapes as the vice president of sales. Chapes was a family friend
and was well-connected in the industry. Chapes received a salary of $84,000,

a company vehicle, an expense account, and health insurance. In comparison,
other salesmen received a base salary of $52,000 plus commission of 2% to
4%.
In August of 2005, Pro-Pac subleased a 148,250-square foot warehouse
facility in East Troy, Wisconsin, from WOW. WOW is a third party logistics
service provider, operating public warehouses in Wisconsin, Illinois, and
Idaho and brokering transportation services for customers around the
country. Around the time Pro-Pac subleased the East Troy warehouse, WOW
was seeking to exit southeast Wisconsin markets, but to expand its
operations in Illinois.
In early 2006, WOW asked Pro-Pac if it would be interested in leasing
another warehouse in Grafton, Wisconsin. David Sarna traveled to Grafton
on April 6, 2006, to discuss the deal with WOW. Jamie Wally (“Wally”),
WOW’s senior vice president of sales and marketing, attended the meeting
and raised WOW’s use of Chapes as a consultant to develop business for
WOW in Illinois. Sarna later testified that he was taken aback when Wally
“made a comment…about us not minding if they were using [Chapes] to fill
some warehouse space.” Sarna noted that Chapes had never revealed he was
sharing information and contacts with WOW. Sarna confronted Chapes
about his contact with WOW. Chapes explained that Wally had approached
him about filling warehouse space for WOW in Madison and that he was just
appeasing Wally until Pro-Pac made a decision regarding the Grafton facility.
Sarna was upset and told Chapes, “from this point forward…if you are
working with WOW or there’s something going on, I need to know what’s
happening. They’re our landlord. This is too close to home.” Sarna said
Chapes agreed and apologized. The Grafton warehouse sublease never

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materialized, but WOW’s comments regarding Chapes’s assistance in filling
warehouse space for WOW sparked further negotiations between the two
companies.
In these negotiations, Sarna sought lease concessions from WOW at
the East Troy facility in exchange for permitting Chapes to consult with
WOW. On July 17, 2006, Sarna sent an email to Wally detailing his demands
for a workable agreement. According to this email, Sarna’s objective was to
increase revenues for WOW in its open buildings, and then to “put a true
partnership together to successfully go after” an opportunity in Melrose
Park, Illinois. Sarna noted that while he was open to risk and willing to allow
Chapes to assist WOW, his priority was to grow his own business and that
“[Chapes] plays heavily into those plans and is a very expensive and
valuable asset to Pro-Pac.” As compensation for sharing this “valuable
resource,” Sarna requested three months of free rent each year, and an
extension of the lease term for an additional two years at the current rate of
$38,500 per month. Sarna confirmed that Chapes was involved in the
decision to seek the rent concessions, and wrote that the rent concessions
approach minimized the risk that Chapes’s assistance to WOW might
jeopardize Pro-Pac and ensured that Pro-Pac’s relationship with Chapes
remained “open and honest.”
Over the next several weeks, the companies continued to negotiate
some type of agreement including rent concessions for Pro-Pac in exchange
for Chapes’s assistance to WOW. However, no mutually agreeable deal could
be reached, and as of August 9, 2006, Pro-Pac and WOW agreed to table the
idea for the present time. When the negotiations concluded without a deal,
Sarna told Chapes not to have contact with Wally, stating: “We’re done with

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these guys. We’ve wasted enough time. I don’t want you to do anything with
them.” According to Sarna, Chapes agreed. In his own testimony, Chapes
denied that Sarna placed any limits on his discussions with WOW. However,
the bankruptcy court found Sarna’s testimony more credible and relied on
it in making this finding of fact. As Chapes has not contested this fact on
appeal, the court accepts it as true.
In the meantime, while negotiations were still taking place – on
August 2, 2006 – George Van Denend (“Van Denend”), the president of
Vangard Distribution, Inc. (“Vangard”), telephoned Chapes. Chapes had
known Van Denend for many years. Indeed, when interviewing with Sarna
for a position with Pro-Pac, Chapes touted Van Denend as one of his prize
contacts – citing his potential as an “ally” for Pro-Pac. Van Denend called
Chapes with a request from Tom Pelafas, Vangard’s director of sales and
marketing. Apparently, one of Vangard’s largest customers was seeking a
warehouse near Chicago to store 500 to 700 semi-truckloads of sugar. The
sugar would be arriving by the end of August, but Vangard needed to know
within 24-hours whether the space could be secured. Chapes suggested that
Van Denend contact WOW. Chapes then called Wally at WOW to inform him
of the “Vangard deal” and told him to contact Pelafas.
When the Vangard deal surfaced, WOW was in the process of
finalizing a lease – which would go into effect in October of 2006 – for a
warehouse in Aurora, Illinois. To accommodate the Vangard account on
short notice, WOW quickly negotiated a short term lease to use the Aurora
facility before October 1, 2006. WOW successfully secured the Vangard
account and continues to store sugar in the Aurora facility.

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Although Pro-Pac and WOW were in the midst of discussions for
WOW’s use of Chapes’s consulting services, neither Chapes nor WOW ever
mentioned the Vangard deal to Pro-Pac. Even after the negotiations ended,
and Sarna had told Chapes not to have any further contact with WOW,
telephone logs indicated numerous phones calls between Chapes and Wally
throughout August 2006. Then, without Pro-Pac’s knowledge, beginning in
August of 2006, WOW began to issue checks to Chapes in compensation for
the Vangard deal. WOW sent him a total of $6,490 – representing 2% of the
gross revenues on the Vangard account through March of 2007. Additionally,
after Pro-Pac filed its Chapter 11 petition, Sarna wrote to Wally asking that
he be included in any conversations with Chapes. Yet, Chapes and Wally
continued to speak unbeknownst to Sarna, via a disposable cell phone paid
for by WOW. Chapes became an employee of WOW in early 2007. With these
facts in mind, the court now turns to the issues at hand.
2.

Legal Standard
On appeal, a district court may affirm, modify, reverse, or remand a

bankruptcy court's judgment, order, or decree. Fed. R. Bankr.P. 8013. Factual
findings are reviewed under a clearly erroneous standard, and conclusions
of law are reviewed de novo. Fed. R. Bankr.P. 8013; In re Newman, 903 F.2d
1150, 1152 (7th Cir.1990).
3.

Discussion
As previously discussed, Chapes challenges the bankruptcy court’s

decision that he breached his fiduciary duty to Pro-Pac as well as its decision
to award $50,000 in punitive damages against Chapes. The court will
consider each issue in turn.

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3.1

Breach of Fiduciary Duty

To prove a claim for breach of fiduciary duty, a plaintiff must establish
that: (1) the defendant owed the plaintiff a fiduciary duty; (2) the defendant
breached that duty; and (3) the breach caused the plaintiff's damage. Berner
Cheese Corp. v. Krug, 2008 WI 95, ¶ 40, 312 Wis.2d 251, 270, 752 N.W.2d 800,
809. Thus, the first question is whether Chapes owed Pro-Pac a fiduciary
duty of loyalty as its employee.
3.1.1

Fiduciary Relationship

The duty of loyalty extends to employees who are not corporate
officers or directors. See InfoCorp, LLC v. Hunt, 2010 WI App 3, ¶ 21, 323
Wis.2d 45, 780 N.W.2d 178 (citing Burg v. Miniature Precision Components, Inc.,
111 Wis.2d 1, 330 N.W.2d 192 (Wis. 1983)). Indeed, Wisconsin courts impose
a fiduciary duty of loyalty upon all “key” employees. Burbank Grease Servs.,
LLC v. Sokolowski, 2006 WI 103, ¶ 42, 294 Wis.2d 274, 304, 717 N.W.2d 781,
796. Whether an employee is a key employee depends on the nature of the
employee's duties. Burbank Grease, 294 Wis.2d 294, ¶ 42.
Here, the bankruptcy court examined Chapes’s duties, responsibilities
and compensation, and properly concluded that these factors established that
Chapes was a key employee of Pro-Pac. Though on appeal, Chapes points
out that he has not conceded his status as a key employee, he does not
present any developed argument in opposition to the bankruptcy court’s
conclusion in this matter. Nor could he. As noted by the bankruptcy court,
at his request, Chapes's title was vice-president of sales, and he was in charge
of sales and marketing for Pro–Pac. Moreover, prior to being hired, Chapes
insisted that he be in complete control of all of his accounts, answerable only
to Sarna. Additionally, Pro–Pac expected Chapes to use his contacts in the
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industry to help Pro–Pac fill warehousing space. Given his experience and
extensive network, Chapes received more generous compensation than other
members of Pro–Pac's sales force and various other perks. Such broad
responsibilities and duties surely establish Chapes as a key employee and,
thus, the bankruptcy court did not err by finding that Chapes owed a
fiduciary duty to Pro-Pac.
Having concluded that Chapes is properly categorized as a key
employee and, therefore, owed a fiduciary duty of loyalty to Pro-Pac, the
court must next ask whether the bankruptcy court erred by finding that
Chapes breached that duty with regard to the Vangard deal. This issue
requires inquiry into whether the Vangard deal was a valid “corporate
opportunity” for Pro-Pac.
3.1.2

Breach of Fiduciary Duty and the Corporate
Opportunity Doctrine

An employee who owes a fiduciary duty of loyalty assumes a legal
obligation “to act solely for the benefit of the principal in all matters
connected with the agency, even at the expense of the agent's own interests.”
Zastrow v. Journal Commc'ns, Inc., 2006 WI 72, ¶ 3 1, 291 Wis.2d 426, 445–46,
718 N.W.2d 51, 60. Among other standards, Zastrow teaches that the duty of
loyalty imposes upon the employee a legal obligation to: (1) refrain from
taking self-interested opportunities; (2) keep privileged information
confidential; and (3) fully disclose all information that may be beneficial to
the employer. 291 Wis.2d 426, ¶¶ 34, 35, 718 N.W.2d 51. The diversion of an
employer's business by a key employee to a competitor violates these
standards. See InfoCorp, 323 Wis.2d 45, ¶¶ 31, 32, 780 N.W.2d 178. Finding an
employee liable for diverting business requires a court to conclude that the

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actions of the disloyal employee prevented the employer from realizing a
corporate opportunity in which the employer had an interest or expectancy.
See Racine v. Weisflog, 165 Wis.2d 184, 190, 477 N.W.2d 326, 329 (Wis. Ct. App.
1991). To make this determination, the employer must first demonstrate the
existence of a corporate opportunity. Id. at 195–96, 477 N.W.2d 326. Once this
has been proved, the burden then shifts to the employee to show that, despite
the loss of the corporate opportunity, the employee did not breach a
fiduciary duty. Id.
On appeal, the parties squabble over the appropriate standard of
review regarding whether a corporate opportunity existed under the
circumstances of this case. Chapes argues that the court must review the
issue de novo, while Pro-Pac contends that the more deferential clearly
erroneous standard is appropriate. Though the question of whether a given
corporate opportunity exists is largely a question of fact, see Havlicek/Fleisher
Enterprises v. Bridgeman, 788 F.Supp. 289, 398 (E.D. Wis. 1992) (“Whether a
business opportunity is a corporate opportunity…is a question of fact that
should be resolved by taking into account the circumstances surrounding the
opportunity at the time it arose.”), the question of whether facts fulfill a
particular legal stand is itself a question of law. Suburban Motors of Grafton v.
Forester, 134 Wis.2d 183, 188-89 (Wis. Ct. App. 1986) (citing Eastman v. City of
Madison, 117 Wis.2d 106, 112, 342 N.W.2d 764, 767 (Wis. Ct. App. 1983)).
Thus, to the extent Chapes is arguing that the undisputed and found facts do
not support the bankruptcy court’s legal conclusions concerning the
applicability of the corporate opportunity doctrine, this court shall review the
issue using a de novo standard. However, to the extent Chapes takes issue

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with the factual findings of the bankruptcy court, this court will review those
findings using the clearly erroneous standard.
In determining whether a corporate opportunity exists, courts should
consider the corporation’s ability to take advantage of the opportunity
presented to and seized by the employee. Racine v. Weisflog, 165 Wis.2d at
194. Among the circumstances to be considered are whether the opportunity
relates to the corporation's business purpose and whether the corporation
has the ability to pursue the opportunity through its resources. Id.1
There is little dispute that the Vangard opportunity related to a
business purpose similar to the accounts Pro-Pac was already seeking out or
accommodating. With the hiring of Chapes, Pro-Pac was attempting to build
its business of charging for storage, handling and warehousing of goods and
products for manufacturers. The Vangard deal fit squarely within this
business as Vangard contacted Chapes to secure a warehouse in which one
of its largest customers could store sugar.

1

Chapes argues that the bankruptcy court erred by not taking into account
all of the factors that should guide a court in determining the existence of a
corporate opportunity as enunciated by the court in Racine v. Weisflog, 165 Wis.2d
at 194. However, this argument is not persuasive. To be sure, the Weisflog court lists
numerous factors that a court should consider in the corporate opportunity context.
And, while the bankruptcy court did not explicitly discuss each factor in the precise
terms articulated in Weisflog, its comprehensive analysis at this first prong of the
corporate opportunity test is evidence that it considered all of the relevant factors
in reaching its determination. Moreover, at this prong of the analysis, the court’s
main duty is to examine the relationship between the corporation and the alleged
corporate opportunity. If a court finds a plaintiff has established that the business
opportunity is reasonably related to the corporation's current purposes and
activities and that the corporation had the skills or resources to take advantage of
the opportunity, then the court has fulfilled its duty at this prong of the analysis.
Here, the bankruptcy court did precisely that.

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Chapes’s main argument on appeal, however, is that Pro-Pac was not
in a position to avail itself of the Vangard opportunity. As support for this
argument, Chapes cites to his own testimony that Pro-Pac did not have
Illinois warehousing space and had not been working on obtaining Illinois
warehousing space, as well as that he personally did not believe there was
any way Pro-Pac could have provided this warehouse space to Vangard
within the given deadline. There are several flaws with this argument. First,
the fact that Pro-Pac did not have Illinois warehousing space and had not
been working on obtaining Illinois warehousing space, while perhaps placing
Pro-Pac at a disadvantage in obtaining such space on short notice, did not
necessarily mean that Pro-Pac lacked the ability to take advantage of the
Vangard opportunity in some way. Indeed, as the bankruptcy court noted,
there was the possibility that Pro-Pac could have found space – via Chapes’s
connections – whether by contacting a broker, or by leasing or subleasing
space from some other entity, such as WOW. In this respect, Chapes’s
contacts and connections would have been key.
Chapes turns up his nose at this possibility, labeling it as entirely
speculative and not sufficient to support the bankruptcy court’s
determination that Pro-Pac could have availed itself of the Vangard
opportunity. However, again, the only evidence Chapes points to in this
respect is his own unsupported assertion that he could not have assisted ProPac to lease space on a quick basis to accommodate storage of the sugar. Yet,
the record contains evidence supporting quite the opposite. Specifically, ProPac hired Chapes to grow its warehousing business. Chapes had previously
worked in Chicago, with many connections in that area. In fact, in preemployment negotiations with Sarna, Chapes showed him leather binders

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filled with business cards and particularly pointed out Van Denend of
Vangard as an ally who could assist with securing another lucrative account.
What is most telling, however, is that when Vangard needed space
immediately to accommodate the storage of sugar for one of its clients, it
contacted Chapes to find that space. And, the nail in the coffin – Chapes
found that space within the given deadline. Indeed, he diverted the
opportunity to WOW because he knew WOW had warehouse space it
needed to fill. Thus, it is clear that Chapes had the knowledge and
connections to find the required space in the given amount of time.
Moreover, WOW had previously subleased warehouse space for ProPac’s use. Thus, it is not out of the question that Pro-Pac may have been able
to negotiate the use of WOW’s available space through a lease or some other
arrangement. And, at the very least, Pro-Pac may have been able to collect
a referral fee from WOW for the Vangard deal. In fact, Chapes ultimately
received compensation from WOW for the referral of the Vangard deal. This
is compensation that could have – indeed, should have – been realized by
Pro-Pac, as Chapes owed a duty of loyalty to act solely for the benefit of ProPac in all matters connected with his agency, even at the expense of his own
interests. See Zastrow, 291 Wis.2d at 445–46. Faced with this evidence, it was
not unreasonable for the bankruptcy court to conclude that Chapes could
have helped Pro-Pac secure the Vangard deal by finding warehouse space
within the 24-hour deadline. Furthermore, whether or not Pro-Pac could
actually have found the necessary warehousing space, it could easily have
profited from the Vangard opportunity by using it as leverage in its
contemporaneous negotiations with WOW concerning rent concessions and
WOW’s use of Chapes’s knowledge and connections in its own warehousing

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business. Ultimately, Chapes offers the court no meritorious reason to disturb
the bankruptcy court’s factual findings or legal conclusions concerning its
determination that the Vangard deal was a corporate opportunity for ProPac.
If the corporation can establish the existence of a corporate
opportunity, as is the case here, the burden of proof then shifts to the
defendant to prove that his actions do not constitute a breach of his fiduciary
duty. Weisflog, 165 Wis.2d at 195–96. In this second prong of the analysis,
consideration must be given to certain equitable factors, such as the
relationship between the employee and the corporation, the circumstances
before, during, and after the employee seizes the corporate opportunity, and
whether the seized opportunity places the employee in direct competition
with the corporation. Id. Central to this analysis is whether the corporation
was “given the opportunity to decide, upon full disclosure of the pertinent
facts, whether it wishes to enter into a business that is reasonably incident to
its present or prospective operations.” Suburban Motors, 134 Wis.2d at 193.
Therefore, the court must next consider whether, despite failing to disclose
the Vangard deal to Sarna, Chapes did not violate his fiduciary duty. See
Weisflog, 165 Wis.2d at 195–96.
Here, again, the court agrees with the bankruptcy court’s conclusions
that Chapes’s failure to disclose the deal to Sarna and Pro-Pac is inexcusable
and constitutes a violation of Chapes’s fiduciary duty of loyalty to Pro-Pac.
In General Automotive Mfg. Co. v. Singer, 19 Wis.2d 528, 120 N.W. 2d 659 (Wis.
1963), the Wisconsin Supreme Court – faced with a similar factual scenario
– found that a manager’s failure to disclose prospective business to his
employer and his retention of secret profits from that business violated his
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fiduciary duty to act solely for the benefit of his employer. Though the Singer
court did not couch its decision in terms of the corporate opportunity
doctrine, the decision is highly applicable to the circumstances of the present
case. For one, much like the manager in Singer, Chapes argues that, in his
opinion, Pro-Pac would have been unable to take advantage of the business
opportunity and, thus, he was free to refer that business to a third-party. Yet,
this thinking and conduct on the part of a fiduciary are precisely what the
Singer court found to be problematic. Indeed, despite the manager’s belief
that his employer could not meet the needs of the potential customer, the
Singer court noted that the manager had the duty to disclose all the relevant
facts to his employer, and “upon disclosure…it was [his employer’s]
discretion to refuse to accept orders from [the customer] or to fill them if
possible or to sub-job them…” Id. at 534-45.
In the case at hand, Chapes was well aware of Pro-Pac’s attempts to
expand its warehousing business and of its warehouse lease arrangements
with WOW. Additionally, he knew about the pending negotiations between
Pro-Pac and WOW for his consulting services – which included his network
of contacts and referrals – in exchange for rent concessions. Thus, when
Chapes received the Vangard referral, he should have disclosed it to Sarna.
Sarna might have decided to attempt to find warehouse space on his own or
he might have agreed with Chapes that given the short deadline and other
issues, the Vangard deal should simply be referred to WOW. Or, Sarna could
have concluded that the referral could be used in his negotiations with WOW
for rent concessions. The significant point is that it was Pro-Pac’s decision to
make whether or not to take advantage of the Vangard deal in some way. By
keeping the opportunity to himself, rather than sharing it with Pro-Pac, and
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in turn by referring it to a competitor, Chapes breached his fiduciary duty of
loyalty to Pro-Pac.
Lastly, though Chapes does not raise it as an issue on appeal, it is
worth noting that the bankruptcy court properly found that Chapes’s referral
of the Vangard deal to WOW without disclosing it to Sarna was a substantial
factor contributing to Pro-Pac’s lost opportunity and damages. Thus, Pro-Pac
has sufficiently proved its claim for a breach of fiduciary duty by establishing
that Chapes owed it a fiduciary duty, that Chapes breached that duty, and
that the breach caused Pro-Pac’s damage. See Berner Cheese Corp., 312 Wis.2d
at 270. Accordingly, the court will affirm the bankruptcy court’s decision in
this regard.
3.2

Punitive Damages

Chapes next argues that the bankruptcy court erred in awarding
punitive damages against Chapes because Pro-Pac provided insufficient
evidence that Chapes’s actions were in an intentional disregard of the rights
of Pro-Pac. “The plaintiff may receive punitive damages if evidence is
submitted showing that the defendant acted maliciously toward the plaintiff
or in an intentional disregard of the rights of the plaintiff.” Wis. Stat.
§ 895.043(3). Specifically, the evidence must show that the defendant's
conduct is: “(1) deliberate, (2) in actual disregard of the rights of another,
and (3) sufficiently aggravated to warrant punishment by punitive
damages.” Berner Cheese Corp., 312 Wis.2d at 280 (citing Strenke v. Hogner,
2005 WI 25, 279 Wis.2d 52, 694 N.W.2d 296). This burden does not require a
plaintiff to show that defendant intended to cause harm or injury to the
plaintiff. D.L. Anderson's Lakeside Leisure Co. v. Anderson, 2008 WI 126, ¶ 77,

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314 Wis.2d 560, 757 N.W.2d 803 (citing Wischer v. Mitsubishi Heavy Indus. Am.,
Inc., 2005 WI 26, ¶ 61, 279 Wis.2d 4, 694 N.W.2d 320).
Here, there was ample evidence from which the bankruptcy court
could have determined that an award of punitive damages was appropriate.
First, there is no question that Chapes’s conduct disregarded Pro-Pac’s
agency rights. In other words, Chapes disregarded Pro-Pac’s right as a
principal to have its agent act in accordance with his duty of loyalty.
Moreover, as the bankruptcy court noted, the record contains clear evidence
of Chapes’s deliberate conduct. Not only did Chapes tout his contacts to gain
employment with Pro-Pac – most notably with Vangard’s Van Denend – but
he was also tasked with using these contacts to cultivate Pro-Pac’s
warehousing business. Thus, Chapes knew his value to Pro-Pac. Yet, instead
of only using these connections to benefit his employer, he used them to
benefit WOW – a competitor and a company that he knew was engaged in
negotiations with his employer over the use of those very same connections.
Indeed, even Chapes’s failure to disclose the Vangard deal to Pro-Pac
cannot be considered unintentional. Before the Vangard deal arose, Sarna
learned that Chapes had been communicating with WOW and aiding WOW
in filling some of its warehouse space. Shocked and upset, Sarna confronted
Chapes and informed him that he must disclose any further communications
with WOW, adding that “this is too close to home.” Nevertheless, when
Vangard contacted Chapes with its need for warehouse space, Chapes only
communicated the deal to WOW and failed to disclose it to Sarna, even
though he was on notice that Sarna wanted to be informed of any contact
with WOW. This conduct is exacerbated by the fact that Chapes was fully
aware of the rent concession negotiations taking place between WOW and

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Pro-Pac. In fact, it was Sarna’s realization that WOW sought Chapes’s
warehousing business connections that sparked these negotiations. Thus,
despite his protestations to the contrary, Chapes was certainly aware that
Pro-Pac would fail to realize some benefit by his diversion of the Vangard
deal to WOW without Pro-Pac’s knowledge or involvement. Accordingly, the
bankruptcy court properly found that there was ample egregious conduct on
the part of Chapes to warrant an award of punitive damages in this case.
Lastly, Chapes argues that the $50,000 award of punitive damages is
excessive. Chapes contends that the award is excessive because: (1) it is eight
times the amount of compensatory damages; (2) the bankruptcy court found
that Chapes referred only one corporate opportunity to WOW in breach of
his fiduciary duty; (3) at the time Chapes made the referral he did it without
the expectation that he would be compensated personally; (4) the referral
was not prearranged; and (5) the bankruptcy court did not make any
findings regarding Chapes’s ability to pay such a large award.
First, the court notes that Chapes has most likely waived any
argument over the excessiveness of the damages award as he raises it for the
first time, in any substantial depth, in his reply brief. See Padula v. Leimbach,
656 F.3d 595, 605 (7th Cir. 2011) (finding that arguments raised for the first
time in a reply brief are waived). However, even so, the court finds that the
award is not excessive. While the actual damages against Chapes equaled a
mere $6,490 – representing the referral fee he received from WOW – the
actual damages against WOW equaled $385,000. Thus, taking into account
the entirety of the circumstances of this case, an award of $50,000 against
Chapes is not at the outer edge of punitive damages awards that have been
allowed. In fact, under Wisconsin law, “[t]he test of excessiveness does not

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necessarily depend upon some arbitrary proportion.” Malco, Inc. v. Midwest
Aluminum Sales, Inc., 14 Wis.2d 57, 109 N.W.2d 516, 521 (Wis. 1961). Instead,
the Seventh Circuit has found that the “most straightforward rationale for
punitive damages…that exceed the actual injury done by (or profit obtained
by) the tortfeasor…is that they are necessary to deter torts…that are
concealable.” Federal Deposit Ins. Corp. v. W.R. Grace & Co., 877 F.2d 614, 623
(7th Cir. 1989). In the context of fraud, the Seventh Circuit reasoned that if
the average defrauder is caught only half the time, to confront him with a
sanction that will make fraud worthless to him and thus deter him, it is
necessary that when he is caught he be made to pay much more than he
profits on his fraudulent conduct. Id. This rationale holds true to the case at
hand. Here, as noted by the bankruptcy court, Chapes and WOW actively
hid the Vangard referral from Pro-Pac. Moreover, there was evidence in the
record indicating that the Vangard deal was not the only incident in which
Chapes may have been providing WOW with the value of his connections to
the disadvantage of Pro-Pac. Thus, to deter Chapes from any similar future
conduct it is necessary to confront him with a sanction in excess of the profit
he makes on that conduct. While $50,000 is a large sum, especially for an
individual such as Chapes, the damage his actions have caused is arguably
much greater than the actual damages award against him personally.
Accordingly, for all of the above-cited reasons, the court finds the award of
$50,000 against Chapes was not excessive. Therefore, the court will affirm the
bankruptcy court’s decision in this regard.
Accordingly,

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IT IS ORDERED that the bankruptcy court’s memorandum decision
that Chapes breached his fiduciary duty to Pro-Pac be and the same is hereby
AFFIRMED;
IT IS FURTHER ORDERED that the bankruptcy court’s
memorandum decision awarding $50,000 in punitive damages against
Chapes for his intentional disregard for Pro-Pac’s rights be and the same is
hereby AFFIRMED; and
IT IS FURTHER ORDERED that this appeal be and the same is
hereby DISMISSED.
The clerk of court is ordered to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 30th day of May, 2012.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge

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