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  • April 11, 2023

    Member of LLC that Purchased Property Failed to a State Claim

    A member of two LLCs failed to state a claim for relief when he sued over an allegedly fraudulent real estate transaction to which he was not a party, the Wisconsin Supreme has held

    Jeff M. Brown

    A Red And White For Sale Sign Outside A Cape Cod Style House Shaded By Trees On A Summer Day

    April 11, 2023 – A member of two LLCs failed to state a claim for relief when he sued over an allegedly fraudulent real estate transaction to which he was not a party, the Wisconsin Supreme has held.

    In Pagoudis v. Keidl, 2023 WI 27 (April 4, 2023), the supreme court held (5-2) that only the LLC that was a party to the real estate contract stated legally sufficient claims.

    Justice Jill Karofsky wrote the majority opinion, joined by Chief Justice Ziegler, Justice Ann Walsh Bradley, Justice Rebecca Dallet, and Justice Brian Hagedorn. Justice Ziegler wrote a concurrence, joined by Justice Hagedorn.

    Justice Patience Roggensack concurred in part and dissented in part. Justice Rebecca Bradley concurred in part and dissented in part.

    One Man, Two LLCs

    Louis Pagoudis owned and was the sole member of two LLCs: Sead LLC and Kearns LLC.

    Jeff M. Brown Jeff M. Brown , Willamette Univ. School of Law 1997, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.

    In 2017, Pagoudis negotiated the purchase of a piece of a house and land in the Village of Jackson from Marcus and Amy Keidl.

    In the course of the negotiations, the Keidls provided Pagoudis with a real estate condition report (RECR). The RECR bore Amy Keidl’s signature.

    After receiving the RECR, Pagoudis signed an offer to purchase. According to the terms of the offer to purchase, the contract was between the Keidls and Pagoudis “or assigns.”

    Sead LLC executed the contract and took title to the property. Several months later, Sead LLC assigned the property to Kearns LLC.

    Bugs and Mildew

    After the purchase, Pagoudis discovered that the house contained water and mildew in the basement and multiple insect infestations – conditions not disclosed in the RECR.

    Pagoudis and the two LLCs filed a lawsuit against the Keidls in Washington County Circuit Court. The plaintiffs asserted claims for breach of contract, common law misrepresentation, and statutory misrepresentation.

    The Keidls filed a motion to dismiss for failure to state a claim upon which relief could be granted.

    The circuit court granted the Keidls motion. The plaintiffs filed a motion for reconsideration.

    The circuit court concluded that Pagoudis and Kearns LLC had no standing, because they were not parties to the sale of the property. Pagoudis appealed.

    No Standing

    The Wisconsin Court of Appeals held that at least one of the plaintiffs had standing and reversed and remanded.

    The Keidls appealed.

    Member Separate from LLCs

    Justice Karofsky began her opinion for the majority by explaining that whether each plaintiff had sufficiently pled a claim for relief, rather than standing, was the determinative issue.

    Karofsky pointed that the plaintiffs had alleged their claims collectively without differentiating between the claims and the interests of Pagoudis and the two LLCs.

    However, she explained, the plaintiffs’ interests were not collective, given that Wisconsin statutes specify that:

    • the property interest of an LLC and its members are separate;

    • an LLC member may act as an agent of the LLC but does not share the LLC’s liabilities simply because he or she is a member; and

    • an LLC member is generally not personally liable for any debt, obligation, or liability of the LLC.

    “Taken together, these statutes establish that LLCs are individual entities that are legally separate from their members and from other LLCs, regardless of common ownership,” Karofsky wrote.

    Pagoudis not a Party

    As a result, Karofsky wrote, each of Pagoudis’ claims must be dismissed because he wasn’t a party to the final contract and didn’t buy the property.

    While Pagoudis signed the contract, Justice Karofsky explained that he did so either as an agent of Sead or assigned his rights in the contract to Sead before the purchase closed, because it was Sead that took title from the Keidls.

    Sead’s Claims Survive

    Sead’s allegations met each element of the breach of contract claim and its misrepresentation claims, Karofsky explained, because it was Sead that the Keidls made the contract with.

    The circuit court erred by concluding that Sead lacked standing because it no longer held title to the property – current or continual possession was not an element of any of the claims included in the plaintiffs’ complaint, Justice Karofsky pointed out.

    “The question is whether Sead LLC suffered damages before transferring the property,” Karofsky wrote.

    Kearns not a Party

    Justice Karofsky concluded that both Kearns’ breach of contract claim and its misrepresentation claims must be dismissed, because: 1) it was not a party to the contract with the Keidls; and 2) the complaint didn’t allege that the Keidls made any representations to Kearns.

    Ziegler Concurrence: Admissions Determinative

    In her concurrence, Justice Ziegler pointed out the supreme court would usually construe the pleading in a light most favorable to the non-moving party. Such an approach, she explained, could allow a conclusion that the pleadings sufficiently alleged that Pagoudis initially purchased the property in his personal capacity.

    However, Justice Ziegler wrote, “Counsel’s admissions demonstrate that Pagoudis only ever acted through his LLC, never in his personal capacity.”

    Roggensack Concurrence/Dissent: Allow Claims to Proceed

    Justice Roggensack agreed that Sead’s claims must be dismissed for failure to state a claim.

    But she argued that the misrepresentation and false advertising claims made by Pagoudis and Kearns should be allowed, so those parties could develop facts relevant to the claim.

    Roggensack also argued that the majority ignored the fact that misrepresentation and false advertising claims sounded in tort and were therefore assignable by Pagoudis to either or both of the LLCs.

    “Here, an ‘assignment’ from Pagoudis is not in the record, so we do not know if there is a document that sets the terms of the assignment,” Roggensack wrote.

    R.G. Bradley Concurrence/Dissent: Statute ‘Castrated’

    In her dissent, Justice R.G. Bradley argued that the supreme court over a series of cases had “castrated” the plain meaning of section 100.18(1).

    The statute prohibits fraudulent real estate-related representations “to the public.” However, R.G. Bradley explained, the supreme court has held that a statement made to a single person fell within the ambit of section 100.18.

    She argued that the majority erred by holding that the Keidls had made a representation to the public by making representations to Sead.

    “The plain statutory language does not extend to representations made solely to the buyer during a private real estate transaction,” R.G. Bradley wrote.

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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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