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  • September 14, 2022

    Senior Housing: Circumstantial Evidence Sufficient to Prove Misrepresentation

    A property management company that had knowledge of the property owner’s precarious financial state had a duty to disclose that condition to prospective residents, the Wisconsin Court of Appeals has ruled.
    An Elderly Woman Signing A Form While Seated Across A Desk From A Younger Woman

    Sept. 14, 2022 – A property management company that had knowledge of the property owner’s precarious financial state had a duty to disclose that condition to prospective residents, the Wisconsin Court of Appeals has ruled.

    In Beuttler v. Marquardt Management Services, Inc., 2020AP1767 (June 22, 2022), the Wisconsin Court of Appeals also held that three of the plaintiffs may use circumstantial evidence to prove they actually relied on misrepresentations made by the property management company.

    Receivership and a New Manager

    A nonprofit corporation, The Atrium of Racine, Inc., (Atrium Corporation) owned two senior housing facilities in Racine; one of the facilities was called the Atrium.

    Jeff M. Brown Jeff M. Brown is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.

    Atrium residents had to pay an entrance fee in addition to monthly rent. The corporation agreed to refund a portion of the entrance fee within two years of an occupancy’s termination, as long as the unit was re-rented.

    In March 2015, Marquardt Management Services, Inc. (Marquardt) took over management of the Atrium. The company that had previously operated the Atrium filed for receivership in late 2014.

    New Terms for Refunds

    To avoid similar difficulties, Marquardt boosted the entrance fee it charged to residents and implemented an aggressive marketing plan.

    To address concerns that it would be unable to refund residents’ entrance fees, Marquardt tweaked the terms under which it would refund residents 90% of their entrance fees.

    Under the new terms, Marquardt agreed to make entrance fee refunds as soon as either: 1) it received a new entrance fee for the unit; or 2) 24 months had passed since the termination of the occupancy.

    Residents Not Told of Financial Condition

    The seventeen plaintiffs in the case were elderly people who signed contracts with the Atrium after Marquardt took over management of the facility. Each paid between $84,000 and $111,500 in entrance fees.

    Each plaintiff met with Joe Reischl, the Atrium’s director of marketing, before signing a residency agreement and paying the entrance fee.

    Reischl told each of the plaintiffs that Atrium would refund 90% of the entrance fee. He made no representation about the Atrium Corporation’s financial condition.

    Another Receivership

    In May 2017, the Atrium Corporation went into receivership.

    The circuit court handling the receivership declared that all rights of Atrium residents in entrance fee refunds from the proceeds of the sale of the Atrium Corporation’s assets were subordinate to the rights of the Bank of New York Mellon Trust Company. The bank was the trustee for the Atrium Corporation’s bondholders. 

    The seventeen residents filed a lawsuit in Racine County Court. They alleged that Marquardt had misrepresented The Atrium Corporation’s financial condition and its ability to pay them the entrance fee refunds, as a way to induce them into signing the residency agreements.

    Marquardt moved for summary judgment. It argued that it had no duty to disclose The Atrium Corporation’s financial condition to prospective residents.

    Marquardt also argued that the plaintiffs, either due to diminished capacity or death, were unable to prove that they had relied on any alleged misrepresentation, because none was able to testify that they relied on any such representation.

    The circuit court concluded that Marquardt had a duty to disclose The Atrium Corporation’s financial condition to the plaintiffs. But the court granted summary judgment for Marquardt, because the plaintiffs were not able to testify and the law would not allow them to prove their reliance by circumstantial evidence.

    The plaintiffs appealed.

    Marquardt Had Duty to Disclose

    Writing for a three-judge panel, Judge Lori Kornblum explained that under Wisconsin Supreme Court precedent, whether Marquardt had a duty to disclose its financial condition was governed by a four-factor analysis.

    Marquardt conceded that its financial condition was material to the transactions with the plaintiffs, and that therefore the first factor supported imposing a duty.

    Kornblum explained that the other three factors also supported imposing a duty on Marquardt:

    • Marquardt knew that the plaintiffs were about to engage in a business transaction under a mistake of fact regarding the financial condition of The Atrium Corporation;

    • the The Atrium Corporation’s financial condition was peculiarly and exclusively within Marquardt’s knowledge;

    • the plaintiffs would have reasonably expected Marquardt to disclose The Atrium Corporation’s fiscal condition to them.

    “Specifically, the [plaintiffs] argued that they would have reasonably expected to know that Marquardt had ‘substantial doubt’ as to the Atrium’s ability to continue as a going concern,” Kornblum wrote.

    “We agree, particularly in light of this State’s strong public policy interest in protecting older adults, which is reflected in legislation.”

    Direct Evidence Not Required

    Judge Kornblum noted that the law required plaintiffs to prove that they actually relied on Marquardt’s misrepresentation.

    But she explained that the circuit court erred by granting summary judgment to Marquardt on the basis that plaintiffs could only provide circumstantial evidence of actual reliance.

    State law does not require a plaintiff to present direct evidence to prove the elements of every cause of action, Kornblum explained.

    “Nothing in case law prohibits using circumstantial evidence to prove misrepresentation, contrary to the circuit court’s conclusion,” Judge Kornblum wrote. “Wisconsin cases dating back to 1891 show that the courts have admitted circumstantial evidence to prove fraud without excepting the reliance element.”

    Quantum of the Evidence

    Kornblum wrote that only three of the plaintiffs had shown that they could provide circumstantial evidence of Marquardt’s misrepresentation – affidavits that “contain allegations or a reasonable inference of conversations the affiant had with the [plaintiff] that, if admissible, would constitute sufficient circumstantial evidence to defeat summary judgment.”

    “The affidavits submitted on behalf of these residents indicate that the affiants had personal knowledge based on conversations with the [plaintiff] and could testify about the source of their personal knowledge that the [plaintiff] relied on the promise of the entrance fee being 90% refundable,” Judge Kornblum wrote.

    The court of appeals reversed the circuit court’s judgment with regard to those three plaintiffs and affirmed the judgment with regard to the other 14 plaintiffs.

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    WisBar Court Review, published by the State Bar of Wisconsin, includes summaries and analysis of decisions from the Wisconsin Supreme Court, the Wisconsin Court of Appeals, and the U.S. Court of Appeals for the Seventh Circuit, as well as other court developments. To contribute to this blog, contact Joe Forward.

    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.

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