Sign In
  • September 03, 2021

    Who Can Sue? Determining Standing for Misrepresentation Claims

    Property can change hands multiple times soon after a sale. Ryan M. Billings discusses a recent court of appeals decision that clarifies the circumstances under which a subsequent owner can sue the original seller for fraud.

    Ryan M. Billings

    happy sad face block

    It is not uncommon for ownership to change multiple times soon after the purchase of property.

    For instance, a group of related companies might have one entity purchase undeveloped property, transfer ownership after purchase to another entity to construct buildings or otherwise develop the property, and transfer ownership again upon completion of construction to a third entity that will manage the property.

    As another example, one company might buy an office building, and then engage in an immediate sale-leaseback agreement with another entity.

    There are numerous tax, organizational, and strategic reasons why ownership can change shortly after property is purchased, and the reasons only multiply as time passes. But what if the first entity that bought the property was defrauded by the original owner, and the fraud was not discovered until ownership had changed hands? Which companies in the chain of ownership have standing to bring misrepresentation claims?

    A recent Wisconsin Court of Appeals decision provides guidance on that question.

    Pagoudis v. Keidl

    In Pagoudis v. Keidl,1 Pagoudis bought property from Keidl, relying upon a condition report provided by Keidl in connection with the sale. The offer to purchase indicated that the buyer was Pagoudis “or his assigns.”

    At the time of closing, Sead Properties L.L.C., a company owned and operated by Pagoudis, ultimately purchased the property with money provided by Pagoudis. Several months later, Sead transferred the property to Kearns Management L.L.C., another company owned and operated by Pagoudis.

    Ryan M. Billings Ryan M. Billings, Harvard 2004, is a shareholder and chair of litigation with Kohner, Mann & Kailas, S.C. in Milwaukee, where he represents business entities in civil litigation, appeals, and alternative dispute resolution.

    After Kearns discovered undisclosed defects in the property, Pagoudis, Sead, and Kearns all sued Keidl for breach of contract and various forms of common-law and statutory misrepresentation.2 Keidl moved to dismiss, arguing that none of the three plaintiffs had standing to sue. Pagoudis and Sead lacked standing, Keidl argued, because they were not the owners of the property. Kearns lacked standing, Keidl argued, because Kearns was not a party to the original transaction in which the fraud allegedly occurred.

    The circuit court agreed, holding that Keidl’s alleged misrepresentations “do not follow the property through to subsequent owners.” As a result, the claims of Pagoudis, Sead, and Kearns were all dismissed.

    The Appeal

    All three plaintiffs appealed. In a lengthy and thoughtful opinion, the Wisconsin Court of Appeals reversed the dismissals and remanded for further proceedings. The Pagoudis court explained that a party has standing if they have suffered or are threatened with an injury for which the law provides a remedy.3 The concept of standing bars lawsuits by strangers to the dispute, who have no personal interest in the outcome, and suits that involve injuries for which the law does not provide a remedy, such as hypothetical injuries or injuries that are real but not legally remedial (such as hurt pride).4

    That said, the Pagoudis court explained, standing is not a “gotcha” game that stands in the way of parties who have been harmed. Instead, Wisconsin law favors a broad construction of standing that allows those who have been harmed to access the courts and obtain a remedy.5

    So, the conclusion that nobody has standing to pursue fraud allegedly committed by Keidl is not a result that should be quickly or easily reached.

    Possible Standing to Sue

    The Pagoudis court examined each of the three plaintiffs and found that, depending on facts that were not yet developed, each of the three might have standing to sue.

    First, it was not at all clear what role Pagoudis played in the purchase. Was Pagoudis a purchaser in his own right who assigned or transferred the property to Sead, or was he a mere assignee for Sead, standing in Sead’s shoes? If Pagoudis was a mere assignee for Sead, then Pagoudis legally was Sead, and any misrepresentation to Pagoudis was a misrepresentation to Sead.6

    If Pagoudis was a purchaser in his own right or Pagoudis had some other theory under which he was injured, then Pagoudis might have standing to sue. The Pagoudis court held that the record was too unclear to resolve that question on the record before it.

    Second, the Pagoudis court concluded that Sead did not necessarily lose its standing to sue Keidl when the property was transferred to Kearns.7 The court gave many hypothetical examples of how a party could be injured even though it no longer owned the property in question.

    For instance, Sead might have sold the property to Kearns for less than Sead paid Keidl for it because the defect (if it was unknown to Sead at the time the original purchase price was determined but discovered before the transfer to Kearns) reduced the property’s value.8

    Or, Sead could have agreed to indemnify Kearns for any defect in the property, in which case Sead could properly look to Keidl to cover any liability Sead had to Kearns. And even if Sead transferred the property to Kearns without receiving anything in exchange, Sead was still injured, because Sead received property that was less valuable than what Sead was promised.

    In other words, “gifting” the property to Kearns would not necessarily negate Sead’s original injury, so Sead may have retained standing. The facts again were too unclear to know for sure.

    Third, the Pagoudis court concluded that Kearns may have standing, because the law in certain circumstances permits recovery for “indirect” misrepresentations (meaning misrepresentations made to a party other than the plaintiff).9 So, if Keidl misrepresented the state of the property to Sead, and Sead passed on this misrepresentation to Kearns (not knowing it was false), Keidl may be liable to Kearns for misrepresenting the state of the property to Sead.

    Not all causes of action permit indirect misrepresentation (for instance, strict liability misrepresentation cannot be indirect), but some causes of action potentially may allow an indirect misrepresentation to be actionable.10 And further, Keidl should have reasonably expected that any misrepresentation to Pagoudis could have led to injury to any entity that Pagoudis owned.11

    More Information Was Needed

    The record was not sufficiently developed to decide definitely which of Pagoudis, Sead, or Kearns had standing to sue. The Pagoudis court concluded that the district court had been “unduly rigid” in its standing analysis, and should have allowed the facts to develop further before dismissing the claims of all three plaintiffs.

    Thus, the Pagoudis court reversed the dismissal and remanded the action for further proceedings, allowing Pagoudis, Sead, and Kearns to proceed with their cases.12

    When Should the Standing Door Be Shut?

    While the Pagoudis court focused on the fact that circuit court shut the door too quickly, denying plaintiffs who may have valid claims the opportunity to develop and pursue their theory of injury, it is easy to imagine cases where leaving the standing door open for too long would lead to absurd or undesirable results.

    For instance, what if the property had been transferred 20 times and 30 years had passed before any purchaser discovered the fraud? Would purchaser 20 be able to bring suit for misrepresentation decades after the fact?

    While the statute of limitations for fraud claims in Wisconsin was recently shortened to three years, the three-year clock does not start to run until the fraud is discovered, so this kind of scenario is not beyond the realm of possibility.

    There are other doctrines that might apply and prevent such a result, but allowing fraud to survive ownership changes may inadvertently allow lawsuits that public policy might not want the courts to adjudicate or defendants to have to defend.

    The flip-side of the dangers of an “unduly rigid” view of standing are the dangers of an “unduly flexible” view, and the potentially wide variety of “undesirable” lawsuits that might be filed as a result. The Pagoudis court could only decide the case in front of it, not every possible case that might be filed, but the opinion in Pagoudis explaining reasons why the door should be kept open all but demands a follow-up opinion in the future explaining reasons why the door should be shut.

    More Clarification Is Needed

    Another important question is when these questions should be decided. While the Pagoudis court dealt with muddy pleadings that were not as clear as they could have been, the court had the benefit of review of an amended complaint. The Pagoudis court’s conclusion that standing could not be determined simply by review of the allegations of the amended complaint may mean that standing cannot always be determined at the pleading stage.

    Thus, parties may be required to engage in discovery before standing can be determined, at least in some cases, and the “threshold” issue of whether a party is even properly in court may not be determinable until well into a case, perhaps at the summary judgment stage after discovery, or maybe even as late as trial, if there are material fact disputes.

    Until further clarity is obtained on these issues, however, the law remains unsettled and incomplete.

    Conclusion: Careful Analysis Is Important

    Standing can be a tricky issue, and these kinds of questions will take time and further consideration to answer.

    But the clear upside of Pagoudis is that transfer of ownerships does not automatically defeat misrepresentation claims. Parties who believe they have been injured by a misrepresentation made to a prior owner may be able to obtain relief in court, but careful analysis of the facts is required before a decision to sue is made.

    Endnotes

    1Pagoudis v. Keidl, 2020AP225, 2021 WL 2945584 (Wis. Ct. Ap. July 14, 2021) (recommended for publication).

    2Id. (alleging: breach of an express warranty; strict-liability misrepresentation; false advertising in violation of Wis. Stat. § 100.18; and misrepresentation under Wis. Stat. § 895.446, as a civil remedy for violation of Wis. Stat. § 943.20(1)(d)).

    3Id., at 2-3 (citing Munger v. Seehafer, 2016 WI App 89, ¶ 48, 372 Wis. 2d 749, 890 N.W.2d 22, Marx v. Morris, 2019 WI 34, ¶ 35, 386 Wis. 2d 122, 925 N.W.2d 112, and Foley-Ciccantelli v. Bishop's Grove Condo. Ass'n, 2011 WI 36, ¶ 40, 333 Wis. 2d 402, 797 N.W.2d 789 (citation omitted).)

    4Id. (citing Valley Forge Christian Coll. v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 474-75 (1982), and Foley-Ciccantelli, 333 Wis. 2d 402, ¶¶ 130-34 (Prosser, J., concurring)).

    5Id. (citing Schill v. Wisconsin Rapids Sch. Dist., 2010 WI 86, ¶38, 327 Wis. 2d 572, 592, 786 N.W.2d 177).

    6Id., at 3-4 (citing Peterson v. Johnson, 56 Wis. 2d 145, 149, 201 N.W.2d 507 (1972)).

    7Id., at 4-5 (citing with approval Vaughn v. Dame Construction Co., 223 Cal. App. 3d. 144, 146 (Cal. Ct. App. 1990)).

    8Id., at 4-6 (noting that in Edgewood Manor Apartment Homes, LLC v. RSUI Indem. Co., 733 F.3d 761, 764-65 (7th Cir. 2013) and Kolehouse v. Connecticut Fire Ins. Co., 267 Wis. 120, 125-26, 128, 65 N.W.2d 28 (1954), a plaintiff had been permitted to recover on an insurance policy for property that had been previously sold)).

    9Id., at 7 (quoting Restatement (Second) of Torts § 533 (1977)).

    10Id., at 7-9 (citing Restatement (Second) of Trots § 552C & comment 1(d) and Grube v. Daun, 173 Wis. 2d 30, 69-71, 496 N.W.2d 106 (Ct. App. 1992), overruled on other grounds by Marks v. Houston Cas. Co., 2016 WI 53, ¶ 75, 369 Wis. 2d 547, 881 N.W.2d 309).

    11Id., at 9 (citing with approval Geernaert v. Mitchell, 31 Cal. App. 4th 601, 603-09 (Cal. Ct. App. 1995), and Rhee v. Highland Development Corp., 958 A.2d 385, 387, 397 (Md. Ct. Spec. App. 2008)).

    12Id., at 10. Specifically, the court permitted Pagoudis and Sead to proceed on claims of: (1) breach of express warranty; (2) false advertising under Wis. Stat. § 100.18; (3) misrepresentation under Wis. Stat. § 895.446, as a remedy for violation of Wis. Stat. § 943.20(1)(d); and (4) strict liability representation. Kearns was permitted to proceed on claims (2) and (3).




    Need help? Want to update your email address?
    Contact Customer Service, (800) 728-7788

    Business Law Section Blog is published by the State Bar of Wisconsin. To contribute to this blog, contact Peter Trotter and review Author Submission Guidelines. Learn more about the Business Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

    © 2024 State Bar of Wisconsin, P.O. Box 7158, Madison, WI 53707-7158.

    State Bar of Wisconsin Logo

Join the conversation! Log in to leave a comment.

News & Pubs Search

-
Format: MM/DD/YYYY