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Wisconsin Supreme Court Applies Exception to Economic Loss Doctrine in Real Estate Fraud Case

The Wisconsin Supreme Court recently decided a case with important implications for three developing legal theories: (1) election of remedies; (2) claim preclusion and common-law compulsory counterclaims; and (3) the economic loss doctrine.  Wickenhauser v. Lehtinen, 2007 WI 82.  The case arose out of two separate actions in the trial court.  In the first, Lehtinen sued to enforce his option rights on land owned by the Wickenhausers, but the court agreed with the Wickenhausers’ defense that Lehtinen had fraudulently induced them to grant the option, making it unenforceable.  Shortly after the first action was filed, the Wickenhausers filed a second action against Lehtinen for damages based on the same transaction.  The Wickenhausers prevailed at trial, but the verdict was reversed by the court of appeals.  The supreme court disagreed and reversed the decision of the court of appeals.

On the first issue, the supreme court found that the Wickenhausers’ choice of remedies in the first and second actions was consistent.  The election of remedies doctrine requires a litigant to choose a remedy, where the remedies sought are inconsistent with one another.  A defrauded party in a contract action has the choice whether to rescind the contact and seek rescissory damages, which the Wickenhausers did, or affirm the contract and seek breach of contract damages.

The court also found that the Wickenhausers were not precluded from bringing the second action.  The court found that all of the elements of claim preclusion were present.  However, the court held that claim preclusion, standing alone, is not a bar to a subsequent suit by a defendant who chooses not to counterclaim in the first action.  The common-law compulsory counterclaim rule provides that a subsequent action is barred only if “a favorable judgment in the second action would nullify or impair rights established in the initial action.”  The court found that the judgment in the second action did not nullify the first judgment or impair any rights established in that action.

Finally, the court found that the Wickenhausers’ claim was not barred by the economic loss doctrine.  Wisconsin recognizes a narrow exception to the doctrine for cases in which a purchaser was fraudulently induced into a contract.  The fraud must be “extraneous to, rather than interwoven with, the contract.”  In this case, Lehtinen misrepresented the reasons he wanted the options and that he would not record the option.  The court found that these representations “did not relate to Lehtinen’s performance of the contract,” and therefore the Wickenhausers’ tort action based on those misrepresentations was not barred by the economic loss doctrine.

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