California Court of Appeal, Munoz v. PL Hotel Group, LLC, Docket No. D078215

 

Contract: Fraud in the Execution v. Promissory Fraud

Contract: to Sign without Reading

Duty to Read a Contract before Signing?

 

Fraud in the Execution of a Negotiable Instrument, the Uniform Commercial Code

Reformation

Letter of Intent: Binding Agreement?

Contract Law

Contract Drafting

California Law

 

 

APPEAL from a judgment of the Superior Court of San Diego County, Timothy B. Taylor, Judge. Reversed.

 

This appeal involves a form of fraud rarely seen in day to day litigation. It goes by various names—fraud in the factum, fraud in the execution, fraud in the inception—but they all describe the same genre of deceit. It occurs where, after parties have agreed upon certain contract terms, one of them surreptitiously substitutes a document for signature that looks the same as the earlier draft but contains materially different terms. Fraud in the execution is distinct from promissory fraud, which involves false representations that induce one to enter into a contract containing agreed-upon terms.

 

This case, on appeal after a demurrer was sustained without leave to amend, involves the purchase and leaseback of a vacant hotel and restaurant. The nub of the lawsuit is the buyers’/plaintiffs’ claim that the sellers/defendants surreptitiously substituted altered versions of the lease and financing instruments containing terms extremely adverse to the buyers, and which they allege were neither bargained for nor agreed to.

 

As we explain, these allegations state, quite literally, a textbook cause of action for fraud in the execution, as this illustration from the Restatement Second of Contracts demonstrates:

“A and B reach an understanding that they will execute a written contract containing terms on which they have agreed. It is properly prepared and is read by B, but A substitutes a writing containing essential terms that are different from those agreed upon and thereby induces B to sign it in the belief that it is the one he has read. B’s apparent manifestation of assent is not effective.” (Rest.2d, Contracts (1981) § 163, illus. 2.)

 

But acting under the misapprehension that plaintiffs’ theory was promissory fraud, the superior court sustained a demurrer brought by defendants Inn Lending LLC (Inn Lending) and Rajesh Patel (Rajesh) on the grounds that “insufficient facts” were alleged showing they “made promises” upon which plaintiffs relied. The court also determined that related causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and financial elder abuse also failed. We reverse the resulting judgment of dismissal.

 

The Patels formed PL Hotel Group, LLC (PL) to hold title and listed the property for sale. They structured the transaction to remain in possession after the sale. Toward that end, the sale included a leaseback to the Patels under a triple net lease. From the buyer/landlord’s perspective, the difference between the monthly rent under the lease and cost of financing would be the return on investment.

 

A triple net lease (sometimes designated by the parties here as NNN) is one in which the lessee pays taxes, insurance, and utilities. (See Pate v. Channel Lumber Co. (1997) 51 Cal.App.4th 1447, 1450; 2A Miller & Starr, Cal. Real Est. Forms (2d ed. 2020) § 2:28.) (fn. 2).

 

On July 17, the Patels (via Davis) sent a proposed but unexecuted triple net lease to Cassidy. In an accompanying e-mail, Davis reserved the Patels’ right to “make further edits in case there was an error or oversight.” This lease, which the parties refer to as the “July 17 lease,” was circulated “multiple times” during the 60-day escrow. It was the only lease agreement ever circulated before close of escrow. It contained the agreed lease terms, and at no time before escrow closed did the Patels ever contend there was an “error or oversight” in it.

 

The July 17 lease was for a 20 year term, with specified options to renew. Rent began at $19,167 per month, and periodically increased over the 20 year term. The tenants (Patels) were solely responsible for
(1) maintenance and repairs; (2) insurance; (3) utilities; and (4) taxes.

Unfortunately for Munoz, the differences between the two leases “were not so numerous to be obvious.” For instance, the provision a landlord might be expected to check—rent payments—was unchanged. Munoz signed the September 13 lease after only a cursory review, believing it was the same triple-net lease the parties had circulated and approved numerous times.

 

But as Munoz would soon learn, the September 13 lease was anything but a triple net lease. For example:

·       Maintenance and Repair: Under the July 17 lease, the landlord (Munoz) has no obligation to maintain or repair the premises. But the September 13 lease provides the landlord “shall have the duty to repair” everything beyond normal wear and tear.

·       Renovations: Under the July 17 lease, the tenant (Patels) were obligated to complete renovations. Under the September 13 lease, the landlord is.

·       Taxes: The July 17 lease provides the tenant pays taxes relating to the premises. The September 13 lease limits that obligation to taxes “attributable solely to any business property or personal property of the Tenant” on the premises.

·       Assignment and Subletting: The July 17 lease allows the tenant to sublease to a nonaffiliated entity only with the landlord’s consent. The September 13 lease allows a sublease “without Landlord’s consent at any time.”

·       Tenant’s Continuing Liability: Under the July 17 lease, an assignment or sublease does not release tenant’s liability, including for rent. But under the September 13 lease, a permitted assignment or sublease “eliminates” tenants’ liability.

·       Landlord’s Remedy: The September 13 lease adds a new provision that makes retaking possession the landlord’s sole remedy on tenant’s default.

 

Meanwhile, as the Patels’ plan with regard to the altered lease was put in place, Munoz was unable to obtain financing from a conventional lender because the Hotel had been closed for two years. Expecting this, the Patels initiated the second phase of their plan. Not only would they be the seller/tenant in the transaction, but also the secured lender.

 

On the Patels’ behalf, Davis contacted Cassidy (Munoz’s agent) and recommend he hire David Hamilton of Pacific Southwest Realty Services (collectively, Hamilton) as loan broker. But this was all an illusion for Munoz’s consumption. Hamilton had no intention of shopping around for a loan. Instead, he placed the loan with Inn Lending—an alter ego entity of the Patels created just for this purpose.

 

(…) After conducting a hearing, the court sustained the demurrer without leave to amend and entered a judgment of dismissal in favor of Rajesh and Inn Lending. Postjudgment, the court awarded them $92,505 in attorney’s fees plus costs.

 

DISCUSSION

A. The Court Erroneously Sustained the Demurrer to the Fraud Cause of Action.

In the classic case of fraud in the execution, some limitation—such as blindness, illness, or illiteracy—prevents the plaintiff from reading and understanding the contract that he or she is about to sign. (See,
e.g., Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 427‒428 (Rosenthal) [defendants omitted portions of the contract when reading it aloud to plaintiff, who could not read English]; Erickson v. Bohne (1955) 130 Cal.App.2d 553, 554‒557 [plaintiff’s daughter took advantage of her physical and mental illness by tricking her into signing a deed]; Jones v. Adams Financial Services (1999) 71 Cal.App.4th 831, 835‒840 [defendants tricked an elderly legally blind woman into a reverse mortgage by telling her she was authorizing them to learn the payoff on her mortgage].)

 

Closer to the facts alleged here, fraud in the execution may also occur where a contract is surreptitiously modified. In Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, for example, the owner of commercial property signed an agreement to sell the properties for $70 million in cash and another $5 million a year later. He alleged that after he signed the agreement, the buyers covertly substituted a provision entitling them to hold back the last $5 million for five years instead of one. The court held those allegations sufficed for fraud in the execution. (Id. at p. 764.)

 

Another variation is typified by California Trust, a case Munoz cited in his opposition to the demurrer. There, when the plaintiff sued to quiet title to certain real property, the defendants cross-complained alleging fraud in the execution. (California Trust, supra, 214 Cal. at p. 622.) According to the cross-complaint, the plaintiff represented that if defendants paid $7,500, he would hold title to the property, improve and sell it within a year, and pay the defendants $17,500 of the proceeds. The plaintiff prepared a written agreement and stated it contained these provisions, which defendants signed without reading it. (Id. at p. 623.) When the plaintiff demanded further payment, they read it for the first time and discovered it contained provisions significantly different from the prior oral agreement. (Id. at pp. 623–624.) The Supreme Court determined the cross-complaint alleged sufficient facts to warrant reformation, commenting, “A party to an instrument who by fraud leads the other party to sign without reading it is in no position to urge the latter’s negligence . . . .” (Id. at p. 627.)

 

Other like cases from outside California include Hetchkop v. Woodlawn at Grassmere, Inc. (2nd Cir. 1997) 116 F.3d 28, where a union secretly substituted one document for another while an employee’s back was turned. And in another labor case, Connors v. Fawn Mining Corp. (3d Cir. 1994) 30 F.3d 483, an employer signed a collective bargaining agreement that contained materially different terms than had been promised by the union. There, the Third Circuit observed that fraud in the execution occurs where one party “surreptitiously substitutes a materially different contract document before both sides execute it.” (Id at p. 493.) The Ninth Circuit reached the same conclusion in Operating Engineers Pension Trust v. Gilliam (9th Cir. 1984) 737 F.2d 1501. There, an employer was led to believe he was signing a standard union membership form. Based upon that he “did not read the documents” but merely relied on the union representative’s word. The Court of Appeals concluded, “he who signs a document reasonably believing it is something quite different than it is cannot be bound to the terms of the document.” (Id. at p. 1504.)

 

And finally, on facts not too dissimilar to those alleged by Munoz here, in Settlers’ Hous. Serv. v. Schaumburg Bank & Trust Co., N.A. (Bankr. N.D.Ill. 2017) 568 B.R. 40, the debtor alleged fraud in the execution based on claims that bank officers surreptitiously included within a large pile of documents he signed a note for a line of credit secured by debtor’s property. The court disallowed that portion of the creditor’s claim, noting that a signature procured by fraud in the execution gave no more effect to a contract than one that had been forged. (Id. at pp. 65‒67.) According to the bankruptcy court, that a more cautious person “might have smelled a rat, does not defeat liability.” (Settlers’ Hous. Serv., at p. 67.)

 

These cases reflect society’s understandable desire to repress this pernicious form of fraud. Yet at the same time, there has “always been a sharp struggle” between that policy “upon the one hand, and on the other to discourage negligence and the opportunity and invitation to commit perjury.” (California Trust, supra, 214 Cal. at p. 627.) This countervailing policy is often expressed as a duty to read a contract before signing. Generally, “ ‘ “one who accepts or signs an instrument, which on its face is a contract, is deemed to assent to all its terms, and cannot escape liability on the ground that he or she has not read it. If he or she cannot read, he or she should have it read or explained to him or her.” ’ ” (Ramos v. Westlake Services LLC (2015) 242 Cal.App.4th 674, 686 (Ramos).)

 

In balancing these competing interests, courts have required the plaintiff to have acted in an objectively reasonable manner in failing to become acquainted with the contents of the written agreement. (Rosenthal, supra, 14 Cal.4th at p. 423; Ramos, supra, 242 Cal.App.4th at p. 688.) The plaintiff must not only have been ignorant of the surreptitiously inserted terms, but must also have had no reasonable opportunity to learn that the document contains them.

 

In short, the standard is one of excusable ignorance. In making that determination in the context of fraud in the execution of a negotiable instrument, the Uniform Commercial Code explains the relevant factors include: (1) the party’s intelligence, education, business experience, and ability to read or understand English; (2) the nature of the representations that were made; (3) whether the party reasonably relied on the representations or justifiably had confidence in the person making them; (4) the presence or absence of any third person who might read or explain the instrument to the signer; (5) any other possibility of obtaining independent information about the document’s terms; and (6) the apparent necessity, or lack of it, for acting quickly. (See Cal. U. Com. Code, § 3305, subd. (a)(1)(C) & com. 1, ¶ 5.) We see no reason why these same factors would not also be relevant in determining whether a complaint adequately alleges excusable ignorance here.

 

In contrast, another plaintiff, Raul Pupo had no prior relationship with the defendant or its representative, and the representative did not purport to read the contract to him or orally explain its contents. (Rosenthal, supra, 14 Cal.4th at p. 431.) The court concluded, “Under these circumstances, Pupo’s . . . failure to take measures to learn the contents of the document they signed is attributable to his own negligence, rather than to fraud on the part of defendant or its representatives.” (Ibid.)

 

Letter of Intent:

“ ‘Preliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement. “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” ’ ” (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1389.) Here, on its face the letter of intent for financing states it is not a binding agreement (p. 18).

 

 

(California Court of Appeal, Jan. 3, 2022, Munoz v. PL Hotel Group, LLC, Docket No. D078215, Certified for Publication)

Supreme Court of Wisconsin, Chris Hinrichs and Autovation Limited, v. The Dow Chemical Company d/b/a Dow Automotive, No. 2017AP2361

Contract Law

Torts

Economic Loss Doctrine

Fraud in the Inducement

Misrepresentation

Common Law

Advertisement

Unfair Competition

Consumer Law

Commercial Purchaser

Wisconsin Law

All subsequent references to the Wisconsin statutes are to the 2015-16 version unless otherwise indicated.

Wisconsin Stat. § 100.18(1) provides:

No person, firm, corporation or association, or agent or employee thereof, with intent to sell, distribute, increase the consumption of or in any wise dispose of any real estate, merchandise, securities, employment, service, or anything offered by such person, firm, corporation or association, or agent or employee thereof, directly or indirectly, to the public for sale, hire, use or other distribution, or with intent to induce the public in any manner to enter into any contract or obligation relating to the purchase, sale, hire, use or lease of any real estate, merchandise, securities, employment or service, shall make, publish, disseminate, circulate, or place before the public, or cause, directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, in this state, in a newspaper, magazine or other publication, or in the form of a book, notice, handbill, poster, bill, circular, pamphlet, letter, sign, placard, card, label, or over any radio or television station, or in any other way similar or dissimilar to the foregoing, an advertisement, announcement, statement or representation of any kind to the public relating to such purchase, sale, hire, use or lease of such real estate, merchandise, securities, service or employment or to the terms or conditions thereof, which advertisement, announcement, statement or representation contains any assertion, representation or statement of fact which is untrue, deceptive or misleading.

(This section is part of Wisconsin's Deceptive Trade Practices Act, the purpose of which is "to protect consumers from untrue, deceptive or misleading representations to promote the sale of a product." Bonn v. Haubrich, 123 Wis. 2d 168, 173, 366 N.W.2d 503 (Ct. App. 1985). It is also intended "to deter sellers from making false and misleading representations in order to protect the public." Novell v. Migliaccio, 2008 WI 44, ¶30, 309 Wis. 2d 132, 749 N.W.2d 544).

Hinrichs developed a product called JeeTops, which he manufactures and installs through his company, Autovation Limited. He obtained a patent for the JeeTops in 2010.

JeeTops are acrylic skylights installed aftermarket in the roofs of Jeep Wrangler vehicles equipped with a certain type of hardtop. The complaint describes the JeeTops as giving "front- seat passengers unparalleled views of the outdoors" and rear-seat passengers "unprecedented panoramic views." After installation, "the cumulative effect is to give the Wrangler's occupants the sensation of directly experiencing the environment through which they are driving."

Installation of JeeTops is accomplished using an adhesive manufactured by Dow. The adhesive performs a dual role, attaching the JeeTops to the existing Jeep and maintaining a watertight seal.

(…) Hinrichs relayed to Dow that customers were experiencing cracks in their JeeTops panels.

In examining Hinrichs' common law claims, we conclude that the "fraud in the inducement" exception to the economic loss doctrine does not apply to allow Hinrichs' common law claims to go forward because the alleged misrepresentation is related to the quality and characteristics of the product in question and is thus not extraneous to the contract. We further conclude that the "other property" exception to the economic loss doctrine does not apply to allow Hinrichs' common law claims to go forward because the JeeTops and adhesive are components of an integrated system.

The economic loss doctrine is a judicially created doctrine with three primary purposes. Van Lare v. Vogt, Inc., 2004 WI 110, ¶17, 274 Wis. 2d 631, 683 N.W.2d 46 (citing Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 403, 573 N.W.2d 842 (1998)). First, the doctrine exists to "maintain the fundamental distinction between tort law and contract law . . . ." Id. Second, it protects "commercial parties' freedom to allocate economic risk by contract . . . ." Id. Third, the doctrine encourages "the party best situated to assess the risk of economic loss, the commercial purchaser, to assume, allocate, or insure against that risk." Id. The doctrine has been part of our jurisprudence since it was first adopted by this court in Sunnyslope Grading, Inc. v. Miller, Bradford and Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 (1989).

We have described the economic loss doctrine as holding that "a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories . . . ." Van Lare, 274 Wis. 2d 631, ¶18. "Economic loss" in the context of the doctrine is defined as "the loss in a product's value which occurs because the product is 'inferior in quality and does not work for the general purposes for which it was manufactured and sold.'" Insurance Co. of N. Am., 276 Wis. 2d 361, ¶23 (quoting Wausau Tile, Inc. v. Cty. Concrete Corp., 226 Wis. 2d 235, 246, 593 N.W.2d 445 (1999)). Both direct and consequential economic loss are encompassed within this definition. Daanen & Janssen, Inc., 216 Wis. 2d at 401.

The upshot of the economic loss doctrine is that it "requires transacting parties in Wisconsin to pursue only their contractual remedies when asserting an economic loss claim, in order to preserve the distinction between contract and tort." Ins. Co. of N. Am., 276 Wis. 2d 361, ¶24 (quoting Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶34, 262 Wis. 2d 32, 662 N.W.2d 652).

It "precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies." Id.

We have recognized several exceptions to the economic loss doctrine, two of which are at issue here. See John J. Laubmeier, Demystifying Wisconsin's Economic Loss Doctrine, 2005 Wis. L. Rev. 225, 228 (2005). First, we address the "fraud in the inducement" exception. Subsequently, we turn to the "other property" exception.

This court has recognized "a narrow fraud in the inducement exception" to the economic loss doctrine. Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶42, 283 Wis. 2d 555, 699 N.W.2d 205. We have emphasized the limited nature of this exception. See id.

Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely— —which normally would constitute grounds for invoking the economic loss doctrine——but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior.

Huron Tool and Eng'g Co. v. Precision Consulting Servs., Inc., 532 N.W.2d 541, 545 (Mich. Ct. App. 1995).

Pursuant to this exception, "a fraud in the inducement claim is not barred by the economic loss doctrine where the fraud is extraneous to, rather than interwoven with, the contract." Kaloti Enters., 283 Wis. 2d 555, ¶42 (citations and internal quotation omitted). To invoke the "fraud in the inducement" exception, a plaintiff must demonstrate three elements: (1) that the defendant engaged in an intentional misrepresentation; (2) that the misrepresentation occurred before the contract was formed; and (3) that the alleged misrepresentation was extraneous to the contract. Id. Stating the third element differently, the misrepresentation must "concern matters whose risk and responsibility did not relate to the quality or the characteristics of the goods for which the parties contracted or otherwise involved performance of the contract." Id.

A misrepresentation relates to the quality or characteristics of the goods sold if it is expressly dealt with in the contract's terms. Id., ¶43. If not addressed explicitly in the contract, a misrepresentation is still related to the quality or characteristics of the goods sold, precluding the application of the "fraud in the inducement" exception, if the misrepresentation informs the reasonable expectations of the parties to the risk of loss in the event the goods purchased did not meet the purchaser's expectations. Id.

Hinrichs urges us to apply the "fraud in the inducement" exception here to preclude application of the economic loss doctrine. He contends that his prior purchases of adhesive from Dow do not preclude a claim where a subsequent purchase is induced by a misrepresentation.

We disagree with Hinrichs. His argument ignores a fatal shortcoming: that the alleged misrepresentation regarding the effectiveness of Dow's adhesive is related to the quality and characteristics of the product in question and is thus not extraneous to the contract. As the court of appeals correctly stated, "whether the Dow adhesive was properly functioning on the acrylic used in JeeTops directly relates to its quality and characteristics——in particular its ability to maintain a water- tight seal, which was one of its main functions." Hinrichs, No. 2017AP2361, unpublished slip op., ¶14. Hinrichs therefore cannot fulfill the third necessary element for application of the "fraud in the inducement" exception.

Therefore, we conclude that the "fraud in the inducement" exception to the economic loss doctrine does not apply to allow Hinrichs' common law misrepresentation claims to go forward because the alleged misrepresentation is related to the quality and characteristics of the product in question and is thus not extraneous to the contract.

We turn now to the "other property" exception to the economic loss doctrine. Pursuant to this exception, the economic loss doctrine "does not bar a commercial purchaser's claims based on personal injury or damage to property other than the product, or economic loss claims that are alleged in combination with noneconomic losses." Daanen & Janssen, Inc., 216 Wis. 2d at 402; Grams v. Milk Products, Inc., 2005 WI 112, ¶24, 283 Wis. 2d 511, 699 N.W.2d 167. In other words, the economic loss doctrine bars "the recovery of purely economic losses in consumer transactions through tort remedies where the only damage is to the product purchased by the consumer." State Farm Fire and Cas. Co. v. Hague Quality Water, Int'l, 2013 WI App 10, ¶6, 345 Wis. 2d 741, 826 N.W.2d 412 (citing State Farm Mut. Auto. Ins. Co. v. Ford Motor Co., 225 Wis. 2d 305, 341, 348, 592 N.W.2d 201 (1999)).

To determine whether the "other property" exception applies, we apply a two part test. Id. First, we consider whether the defective product and the damaged property are part of an "integrated system." Id., ¶7. If the product and damaged property are part of such a system, then any damage to that property is considered to be damage to the product itself. Id. That is, "once a part becomes integrated into a completed product or system, the entire product or system ceases to be 'other property' for purposes of the economic loss doctrine." Selzer v. Brunsell Bros., Ltd., 2002 WI App 232, ¶38, 257 Wis. 2d 809, 652 N.W.2d 806.

If the damaged property and the defective product are not part of an integrated system, we then apply the second part of the "other property" test——the "disappointed expectations" test. State Farm Fire and Cas. Co., 345 Wis. 2d 741, ¶7. In doing so, we focus on the product's expected function and whether the purchaser should have foreseen that the product could cause the damage at issue. Id. When claimed damages are merely the result of disappointed expectations of a product's performance, the exception will not apply and the economic loss doctrine will bar recovery in tort. Grams, 283 Wis. 2d 511, ¶3.

The court of appeals here concluded that the JeeTops and the adhesive were components of an integrated system. Hinrichs, No. 2017AP2361, unpublished slip op., ¶15. It reasoned that "they became components of an integrated system once the adhesive was applied to bond the JeeTops to the motor vehicle. At that point, they were integral parts of a greater whole and did not serve an independent purpose." Id. Accordingly, the court of appeals concluded that the "other property" exception did not apply. Id.

We agree with the court of appeals that the JeeTops and the adhesive formed an integrated system.

Wis. 2d 235, provides a useful analogy. In that case, Wausau Tile purchased cement from Medusa Corporation for use in manufacturing concrete paving blocks. Id. at 241. Wausau Tile claimed that the concrete it received from Medusa was defective and brought claims against Medusa sounding in both contract and tort. Id. at 242.

This court determined that the economic loss doctrine barred Wausau Tile's tort claims. Id. at 241. Rejecting Wausau Tile's argument that the "other property" exception applies, this court reasoned that "the pavers were integrated systems comprised of several component materials, including Medusa's cement." Id. at 251. "Various substances incorporated into finished products constitute integral components of those products." Id.

Similarly here, when the adhesive joins a JeeTops to the body of a Jeep, it creates an integrated system. An adhesive does not function on its own——its basic purpose is to integrate two parts by adhering them together. Like the court of appeals did, we see no relevant difference between the products here and others that courts have determined to be components of an integrated system, such as the cement in a concrete paving block in Wausau Tile, a window in a house, a gear in a printing press, a generator connected to a turbine, and a drive system in a helicopter.

(…) Wisconsin Stat. § 100.18 created a new cause of action, providing "protection and remedies for false advertising that do not exist at common law." Kailin, 252 Wis. 2d 676, ¶42; see also K & S Tool & Die Corp. v. Perfection Mach. Sales, Inc., 2007 WI 70, ¶36, 301 Wis. 2d 109, 732 N.W.2d 792 (determining that "the legislature created a distinct cause of action" pursuant to § 100.18). As the Kailin court stated, the policies underlying the economic loss doctrine— —the allocation of risk and the distinction between tort and contract law——are irrelevant to the legislature's choice to provide a purely statutory cause of action and remedy by way of § 100.18. Kailin, 252 Wis. 2d 676, ¶42. A common law restriction like the economic loss doctrine therefore does not apply to Hinrichs' statutory claim.

Therefore, we conclude that the economic loss doctrine does not serve as a bar to claims made under Wis. Stat. § 100.18.

Following Automatic Merchandisers, Wisconsin courts have consistently applied the "particular relationship" test in determining whether a plaintiff is a member of "the public" for purposes of Wis. Stat. § 100.18(1). See, e.g., K & S Tool & Die Corp., 301 Wis. 2d 109, ¶27; Kailin, 252 Wis. 2d 676, ¶44. The test provides that "a plaintiff remains a member of 'the public' unless a particular relationship exists between him or her and the defendant." K & S Tool & Die Corp., 301 Wis. 2d 109, ¶27. Whether such a relationship exists is a question of fact that depends on the peculiar facts and circumstances of the case. Id., ¶¶27, 30 (citing Cawker v. Meyer, 147 Wis. 320, 326, 133 N.W. 157 (1911)).

(…) We reaffirm that one person can be "the public" for purposes of Wis. Stat. § 100.18(1) and decline Dow's invitation to overrule Automatic Merchandisers.

(…) Whether Hinrichs and Dow were in a "particular relationship" so as to remove Hinrichs from the realm of "the public" pursuant to Wis. Stat. § 100.18(1) remains an open question to be determined by the circuit court after further discovery.

Secondary sources: John S. Greene, Navigating Wisconsin's Consumer Protection System, 90 Wis. Law. 22, 24 (Sept. 2017); see also James D. Jeffries, Protection for Consumers Against Unfair and Deceptive Business Practices in Wisconsin, 57 Marq. L. Rev. 559, 595-605 (1974); Mark R. Hinkston, Protecting Consumers in the Modern Age: Wisconsin's Deceptive Trade Practices Act, 81 Wis. Law. 14, 16 (Oct. 2008).

(Supreme Court of Wisconsin, January 9, 2020, Chris Hinrichs and Autovation Limited, v. The Dow Chemical Company d/b/a Dow Automotive, No. 2017AP2361, Review of Decision of the Court of Appeals, Reported at 386 Wis. 2d 351, 927 N.W.2d 156)

U.S. Court of Appeals for the Fifth Circuit, Universal Truckload, Inc., v. Dalton Logistics, Inc., Docket No. 17-20725

Equitable Subrogation

Subrogation

Equity

Contract Law

Unjust Enrichment

Texas Law

Universal Truckload argues that it should have prevailed on its theory of equitable subrogation because it has non-voluntarily paid a debt—payment to subcontractors—that H&P was “primarily liable for” and that “in equity” H&P should have paid. “Equitable subrogation is the legal fiction through which a person or entity, the subrogee, is substituted, or subrogated, to the rights and remedies of another by virtue of having fulfilled an obligation for which [another] was responsible.” Gen. Star Indem. Co. v. Vesta Fire Ins., 173 F.3d 946, 949 (5th Cir. 1999). It applies when “one person, not acting voluntarily, has paid a debt for which another was primarily liable and which in equity should have been paid by the latter.” Frymire Eng’g Co. v. Jomar Int’l, Ltd., 259 S.W.3d 140, 142 (Tex. 2008) (quoting Mid-Continent Ins. v. Liberty Mut. Ins., 236 S.W.3d 765, 774 (Tex. 2007)).

In Frymire, a subcontractor installed a faulty valve that caused damage to a property when a water line ruptured. Id. The subcontractor’s insurance company paid for it, but then sued the valve manufacturer to recover this cost. Id. The valve manufacturer was liable because the damage was caused by the valve manufacturer’s error through no fault of the subcontractor and therefore “in equity should have been paid by” the manufacturer. Id.

Here, Universal Truckload, on its own initiative, entered into a contract with third-party motor carriers to move a portion of H&P’s freight. The contract specifically provided that the motor carriers would be paid by Universal Truckload. Unlike in Frymire, where the subcontractor was supplied with a faulty valve, no error of another party created Universal Truckload’s obligation to the subcontractor. Universal Truckload created its own, independent contractual obligation to pay the subcontractor. And, as the district court noted: “Universal [Truckload] specifically conditioned its contract with the motor carriers seeking payment exclusively from Universal Truckload. Payment under such circumstances cannot be characterized as involuntary.”

(U.S. Court of Appeals for the Fifth Circuit, January 3, 2020, Universal Truckload, Inc., v. Dalton Logistics, Inc., Docket No. 17-20725)

U.S. Court of Appeals for the Fifth Circuit, Universal Truckload, Inc., v. Dalton Logistics, Inc., Docket No. 17-20725

Indication of Interest Letter

Asset Purchase Agreement

Promissory Estoppel

Reliance Damages

Contract Law

Texas Law

Universal Truckload sent Dalton an Indication of Interest Letter and then Don Cochran, president of Universal Truckload’s parent company, and Limback came to North Dakota in April to see Dalton’s operations in person. Dalton claims that since the initial conversation regarding purchasing Dalton, Limback and Cochran were in near-constant communication with Dalton about the purchase, routinely giving assurances that a deal would be finalized soon.

(…) These assurances that the deal would eventually work out allegedly continued for months, all while Dalton continued to deplete its resources to keep the company operational for Universal Truckload’s promised buyout.

In August 2013, Dalton sent financial statements to Universal Truckload. Three weeks later, Universal Truckload sent Dalton an Asset Purchase Agreement offering $10.3 million upfront with a potential two-year earn-out totaling $24.3 million. Dick Meredith called Cochran to object to the new terms and Cochran agreed that this was not the deal Universal Truckload and Dalton had struck in May.

(…) All of Universal Truckload’s claims against Dalton, and Dalton’s crossclaims against Universal Truckload, proceeded to a jury trial. The jury found that Dalton should recover under a promissory estoppel theory. Dalton was awarded $5.7 million in reliance damages—the difference between the amount of cash it had on hand before Universal Truckload’s promise and the “zero” balance in its bank account when Universal Truckload called its bond. The jury awarded Universal Truckload the $1.9 million in freight charges that Dalton owed. The court, however, concluded that the $1.9 million was incurred in reliance on Universal Truckload’s promises and therefore awarded Dalton a $1.9 million offset against Universal Truckload’s breach of contract claim.

(…) Because there was sufficient evidence to conclude Universal Truckload made a promise, Dalton reasonably relied on the promise to its detriment, and that reliance caused Dalton $5.7 million in damages, we affirm the district court’s denial of the JMOL and the jury verdict on Dalton’s promissory estoppel claim.

(…) We have subject-matter jurisdiction under 28 U.S.C. § 1332 because the amount in controversy is over $75,000 and the parties are diverse.

(…) Under the Erie doctrine, this court must apply substantive state law in diversity jurisdiction cases. Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938). Here, the parties agree that Texas law applies.

The elements of promissory estoppel in Texas are: “(1) a promise, (2) reliance thereon that was foreseeable to the promisor, and (3) substantial reliance by the promisee to his detriment.” J.D. Fields & Co. v. U.S. Steel Int’l, 690 F. Supp. 2d 487, 503–04 (S.D. Tex. 2009); see also MetroplexCore, L.L.C. v. Parsons Transportation, Inc., 743 F.3d 964, 977 (5th Cir. 2014).

(…) Dalton points to Universal Truckload’s post-promise conduct. The record on appeal shows that Universal Truckload’s leadership had a “running dialog” about the takeover with Dalton leadership for over a year. Universal Truckload repeatedly asked Dalton to “hang in there,” and assured Dalton that it would “get something done.”

(…) We considered similar facts in MetroplexCore. There, an engineering firm bid for a contract to build a passenger rail line in Houston. 743 F.3d at 968. The lead contractor repeatedly assured MetroplexCore, the plaintiff, that it would be included in the project if the defendant’s bid got accepted. Id. at 970. The defendant regularly reassured MetroplexCore by saying “our commitment to you is still in play,” “we are still committed to MetroplexCore being on the management team,” and “we are going to live up to our commitment to you,” among other reassurances. Id. at 970–71. When MetroplexCore was not included in the project, it sued the lead contractor for reliance damages based on its promise. Id. at 971. We held that these numerous, specific statements constituted actionable promises, and accordingly reversed the district court’s grant of summary judgment for the defendant. Id. at 982.

The reassurances made here seem at least as strong as those made in MetroplexCore. The reassurances given were just as continuous, numerous, and specific. Despite Dalton’s lack of action to formalize the promise, the jury was presented with sufficient evidence to find a promise occurred.

(…) Dalton succeeded on a promissory estoppel theory, which requires the absence of a contract. See Wheeler v. White, 398 S.W.2d 93, 96 (Tex. 1965) (explaining that promissory estoppel exists to furnish a remedy for “reasonable reliance upon an otherwise unenforceable promise”).

(…) Connor holds that reliance on a contract is not reasonable after the other party unequivocally repudiates its obligations. 267 F.3d at 436. Here, there is no contract at issue, and therefore there is nothing Universal Truckload could have “unequivocally repudiated.” Connor does not require reliance damages to stop in August 2013, because the promise at issue was not clearly broken until a much later date— when Universal Truckload expressly told Dalton it would not be purchasing the company at all and required Dalton to repay the $1.9 million.

(…) Mistletoe Express Serv. v. Locke, 762 S.W.2d 637, 638–39 (Tex. App.—Texarkana 1988, no writ) (explaining that a promisor is liable for any debts that a promisee incurred as a foreseeable consequence of the promise).

(U.S. Court of Appeals for the Fifth Circuit, January 3, 2020, Universal Truckload, Inc., v. Dalton Logistics, Inc., Docket No. 17-20725)

Supreme Court of the State of Delaware, Leaf Invenergy Company, v. Invenergy Renewables LLC, Docket No. 308, 2018

Series B Investment Round

Series B Notes

Agreement Governing the Series B Notes

Noteholders’ Right to Convert to Equity and Incorporated an LLC Agreement

Series B Noteholders Could Convert Their Series B Notes into Equity before the Conversion Deadline

To Facilitate a Conversion, the Series B Note Agreement Incorporated an LLC Agreement (“the Series B LLCA”) That Would Come into Effect upon Conversion

The Series B LLCA Also Included Reciprocal Call and Put Rights that Invenergy and the Converted Noteholders Could Exercise Between December 22, 2013 and December 22, 2014

Damages for Breach of Contract

Expectation Interest

Delaware Contract Law

Court Below—Court of Chancery § of the State of Delaware
C.A. No. 11830-VCL

In 2008, Invenergy Wind LLC (“Invenergy”), a wind energy developer, was raising money for a Series B investment round, and Leaf Clean Energy Company (“Leaf Parent”), an investment fund, expressed interest. After extensive negotiations, Leaf Parent invested $30 million in Invenergy Series B notes through a vehicle called Leaf Invenergy Company (“Leaf”). The agreement governing the Series B notes (“Series B Note Agreement”) gave noteholders such as Leaf the right to convert to equity and incorporated an LLC agreement (“Series B LLCA”) that the noteholders and Invenergy would execute upon conversion.

The Series B Note Agreement and the Series B LLCA also included provisions that prohibited Invenergy from conducting a “Material Partial Sale”—a defined term—without Leaf’s consent unless Invenergy paid Leaf a premium called a “Target Multiple”—another defined term. Although the parties renegotiated several aspects of their agreements with one another over the next few years, the consent provisions persisted in substantially similar form into the Third Amended and Restated LLC Agreement (the “LLC Agreement”), which is the operative agreement in this dispute. Those consent provisions form the crux of this litigation.

Leaf filed suit after Invenergy closed a $1.8 billion asset sale—a transaction that Invenergy concedes was a Material Partial Sale—without first obtaining Leaf’s consent or redeeming Leaf’s interest for the Target Multiple.

The consent provisions unambiguously require Invenergy to pay Leaf the Target Multiple if it conducts a Material Partial Sale without Leaf’s consent, and the concept of efficient breach does not permit Invenergy to circumvent that requirement. Because Invenergy conducted a Material Partial Sale without Leaf’s consent and without paying Leaf the Target Multiple, Leaf is entitled to the Target Multiple as contractual damages. We thus award Leaf the Target Multiple in damages on condition that it surrenders its membership interests in Invenergy.

(…) Essentially, Invenergy could conduct a large asset sale with or without the noteholders’ consent. But in exchange for the right to conduct a sale without the noteholders’ consent, the noteholders were afforded the ability to cash out with a handsome agreed-upon return on their investment upon Invenergy’s exercise of that right.

The Series B notes matured on December 22, 2014, but Series B noteholders could convert their Series B notes into equity before the conversion deadline, which was initially set for December 22, 2011. As a practical matter, if Invenergy did poorly, the Series B noteholders would stay in the notes and preserve their debt covenant rights. On the other hand, if Invenergy did well, the Series B noteholders would convert into equity and capture an upside on their investment.

To facilitate a conversion, the Series B Note Agreement incorporated an LLC agreement (“the Series B LLCA”) that would come into effect upon conversion. The Series B LLCA gave the converted noteholder-members many rights similar to what they had as Series B noteholders.

The Series B LLCA also included reciprocal call and put rights that Invenergy and the converted noteholders could exercise between December 22, 2013 and December 22, 2014. Under Section 11.09 of the Series B LLCA, converted noteholders could “require that [Invenergy] purchase all but not less than all” of its interest. The same section provided that Invenergy could “redeem all but not less than all” of the converted noteholders’ interests. These rights collectively ensured that the Series B investors would either exit or renegotiate their investment by December 22, 2014.

The Court of Chancery’s damages discussion recognized the well-settled rule that damages for breach of contract are based on the non-breaching party’s— here Leaf’s—expectation interest. As the Court of Chancery correctly noted, “expectation” is a term of art. When determining expectation damages, courts determine an amount that will give the injured party “the benefit of its bargain by putting that party in the position it would have been but for the breach.” The primary element of expectation damages is the “the value that the performance would have had to the injured party,” or the “loss in value” caused by the deficient performance compared to what had been expected. And on this point, the Court of Chancery laid out the extensive evidence showing beyond any shadow of a doubt that Leaf and Invenergy both harbored the belief—one that persisted until after the court entered its Liability Order—that Leaf was entitled to payment of the Target Multiple if Invenergy engaged in Material Partial Sale without Leaf’s consent, as it did here.

We review questions of contract interpretation and questions of law de novo.

Because the Court of Chancery’s award of only nominal damages instead of the Target Multiple hinged upon its interpretation of Section 8.04, our analysis starts there. When we interpret contracts, our task is to fulfill the “parties’ shared expectations at the time they contracted.” But because Delaware adheres to an objective theory of contracts, the contract’s construction should be that which would be understood by an objective, reasonable third party.

(…) Because it is only the combination of the TerraForm deal plus the failure to obtain consent plus the failure to pay the Target Multiple that constituted the breach, the Court of Chancery should have considered the combination of all of those things when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages will return Leaf to the position it would have been in had Invenergy not breached Section 8.04.

(Supreme Court of the State of Delaware, May 2, 2019, Leaf Invenergy Company, v. Invenergy Renewables LLC, Docket No. 308, 2018)