Lead Opinion
¶ 1. This is a review of an unpublished per curiam decision of the court of appeals that reversed the circuit court's judg
¶ 2. We conclude that the election of remedies doctrine does not bar the Wickenhausers from obtaining damages in this action because rescission of the option in the prior action is consistent with the subsequent award of damages. In addition, their claim in this action is not barred by claim preclusion, nor did the common-law compulsory counterclaim rule require the Wickenhausers to bring their claim for damages as a counterclaim in the first action. Furthermore, the fraud in the inducement exception to the economic loss doctrine is consistent with our holding. However, we do not address several alternative arguments raised by Le-htinen to the court of appeals because they were not brought before us for consideration. Accordingly, we reverse the court of appeals determination and remand to the court of appeals for further proceedings consistent with this opinion.
I. BACKGROUND
¶ 3. The Wickenhausers and Wickenhauser Farms, Inc. own and operate a dairy farm outside of
¶ 4. The Wickenhausers and Lehtinen entered into a series of transactions where Lehtinen loaned money or paid bills on the Wickenhausers' behalf. On September 10, 1997, the Wickenhausers borrowed $130,000 from Lehtinen, which was secured by a mortgage on the 300-acre parcel the Wickenhausers purchased from Burow. Another loan was made by Le-htinen in December 1997, when he provided $66,000 to the Wickenhausers, which also was secured by a mortgage on the 300-acre parcel.
¶ 5. Lehtinen presented the Wickenhausers with an option that he asked the Wickenhausers to sign, which gave Lehtinen a three-year right to purchase the entire 300-acre parcel for $300,000. Lehtinen contended that in exchange for the $66,000 loan, together with his promise to secure an additional loan of $200,000 from his friends Joseph and Sharon Nielsen (the Nielsens), the Wickenhausers agreed to make Lehtinen one-half owner of the 300-acre parcel. However, the Wickenhausers believed that Lehtinen wanted the option only to show the Nielsens that there was sufficient security for their loan and as protection for Lehtinen's loans, if the Wickenhausers defaulted or
¶ 6. In November 2000, Lehtinen claimed he owned a one-half interest in the 300-acre parcel and asked the Wickenhausers to sign a quit claim deed conveying him that interest. The Wickenhausers refused. In December 2000, based on previous loans, Lehtinen attempted to exercise the option to purchase the entire 300-acre parcel, which he had recorded, but the Wickenhausers refused to convey the property. On March 28, 2001, Lehtinen filed an action against the Wickenhausers (the first action) wherein he sought enforcement of the option to purchase the 300-acre parcel.
¶ 7. The Wickenhausers filed an answer in the first action, asserting, as an affirmative defense, that Lehtinen fraudulently induced them to sign the option. The Wickenhausers did not counterclaim for damages in the first action. On April 16, 2001, the Wickenhaus-ers commenced this action, seeking to quiet title to the 300-acre parcel in their names and damages arising from the fraudulent misrepresentations Lehtinen made to induce them to sign the option.
¶ 8. On June 11, 2001, the Wickenhausers moved to consolidate the actions, but their motion was denied. On July 27, the Wickenhausers filed an amended answer in the first action providing more detail about the fraud allegations, but they did not counterclaim for damages.
¶ 9. After testimony had concluded in the first action, the court asked the parties to submit proposed findings of fact, conclusions of law and judgments. In September 2001, the court adopted the Wickenhausers' document without modification. The court found that the Wickenhausers did not agree to grant Lehtinen an
¶ 10. In this action, the Wickenhausers moved to apply issue preclusion to Lehtinen's defenses to their allegations of misrepresentation and liability, asserting that Lehtinen's misrepresentation had been decided in their favor in the first action; and therefore, Lehtinen could not deny liability in this action. Lehtinen moved to dismiss this action based on claim preclusion and the election of remedies doctrine. He asserted that the Wickenhausers were precluded from claiming damages in this action because they were granted rescission in the first action.
¶ 11. The circuit court applied issue preclusion to Lehtinen's defenses to the allegations of misrepresentation and liability, and it also denied Lehtinen's motion to apply claim preclusion to the Wickenhausers' claim in this action. The circuit court did so because it concluded that there are no compulsory counterclaims in Wisconsin. The circuit court recognized that the Wickenhausers had attempted to consolidate the two cases and also noted that "damages were not available in [the first action] and the fact that the remedies available in each case were separate and distinct precludes the application of claim preclusion." The jury found damages resulting from the fraud in the amount of $274,184 and punitive damages in the amount of $500,000. Judgment was entered accordingly.
¶ 13. Since the court of appeals concluded that rescission in the first action barred recovery of damages in this action, it did not address a number of Lehtinen's alternative arguments that were made to the court of appeals but not to us, including whether: (1) applying issue preclusion to the questions of liability and fraud in the first action is fundamentally unfair in this action for damages; (2) the actual damages found by the jury were not supported by the evidence; (3) punitive damages should have been denied as a matter of law; and (4) Lehtinen was denied due process when the jury did not hear all the facts and circumstances surrounding the alleged fraud. Id., ¶ 1 n.1.
¶ 14. We granted the Wickenhausers' petition to review the decision of the court of appeals.
II. DISCUSSION
A. Standard of Review
¶ 15. The circuit court resolved this case by denying Lehtinen's motion for summary judgment that was
B. Election of Remedies
¶ 16. The election of remedies doctrine is "an equitable principle barring one from maintaining inconsistent theories or forms of relief." Head & Seemann, Inc. v. Gregg,
¶ 17. The court of appeals in Head & Seemann explained that the traditional election of remedies doctrine in a contract action provides that a defrauded party may elect either to rescind
¶ 18. In Head & Seemann, the court of appeals explained that rescission and restorative damages are entirely consistent when fraud or misrepresentation is the cause of the claim. Id. at 168.
¶ 19. Prior to our adoption of the court of appeals opinion in Head & Seemann, we examined the election of remedies doctrine in Schwabe v. Chantilly, Inc.,
¶ 20. Like Schwabe, the Wickenhausers' present action does not "upset the determination" reached in the first action; rather, it affirms the first action. In the first action, the Wickenhausers asserted an affirmative defense based on fraud in the inducement of the option,
C. Claim Preclusion and Common-law Compulsory Counterclaims
¶ 21. Lehtinen contends that all the elements of claim preclusion are met, and therefore, this action is barred. He seeks to preclude the Wickenhausers from asserting claims that they did not counterclaim for in the first action.
¶ 22. Theelementsof claim preclusion are: "(l)an identity between the parties or their privies in the prior and present suits; (2) an identity between the causes of action in the two suits; and, (3) a final judgment on the
¶ 23. However, our general statements of claim preclusion involve the application of claim preclusion to a plaintiff in a second action who was also a plaintiff in the first action,
¶ 24. In Wisconsin, generally, counterclaims are permissive. Wis. Stat. § 802.07(1) (2005-06);
¶ 25. However, that is not to say that a defendant who has a claim against a plaintiff in the first action is always free to sit on his claim until some later lawsuit without danger of losing the right to bring it. Wisconsin also has adopted the common-law compulsory counterclaim rule that is set out in Restatement (Second) of Judgments § 22(2)(b) (1982). Menard,
The common-law compulsory counterclaim rule creates an exception to the permissive counterclaim statute and bars a subsequent action by a party who*60 was a defendant in a previous suit if "a favorable judgment in the second action would nullify the judgment in the original action or impair rights established in the initial action." The common-law compulsory counterclaim rule operates to "preserve[] the integrity and finality of judgments and the litigant's reliance on them, by precluding a collateral attack upon a judgment in a subsequent proceeding."
Menard,
¶ 26. The common-law compulsory counterclaim rule is a narrow exception to the general rule of permissive counterclaims. It operates to protect the integrity of judgments from collateral attack by precluding a defendant in the first action from commencing a second action that will nullify the first judgment or impair rights established in the first action. See Kevin M. Clermont, Common-Law Compulsory Counterclaim Rule: Creating Effective and Elegant Res Judicata Doctrine, 79 Notre Dame L. Rev. 1745 (2004).
¶ 27. To determine whether the common-law compulsory counterclaim rule applies to this action, we begin by analyzing whether all the elements of claim
¶ 28. In this case, there is no dispute that the first action resulted in a final judgment on the merits in a court of competent jurisdiction. However, in regard to whether there is an identity of parties, we note that the parties in the two actions are not exactly the same. Wickenhauser Farms, Inc., was named as a defendant in the first action and is not named as a plaintiff in this action. Also, the Nielsens were not parties in the first action, but are named as defendants in this action. However, we have stated that there is an identity of parties when the parties are, for the most part, identical." Sopha v. Owens-Corning Fiberglas Corp.,
¶ 29. Similar to the parties in Sopha, the parties in this second action and the parties in the first action are, for the most part, identical. While the Wickenhausers exact relationship to Wickenhauser Farms, Inc. is not clear, the Wickenhausers' answer to Lehtinen's complaint in the first action establishes that they are officers of Wickenhauser Farms, Inc.
¶ 30. Next, we turn to whether there is an identity of claims. This determination requires us to examine both lawsuits within the framework of the transactional analysis adopted from the Restatement (Second) of Judgments § 24 (1982). Menard,
¶ 31. We conclude that there is an identity of claims between this second action and the first action because the fraud allegations arise out of the same operative facts, i.e., Lehtinen's fraudulent representations that caused the Wickenhausers to sign the option and his subsequent recording of it. The option was rescinded in the first action, and the court concluded that Lehtinen fraudulently induced the Wickenhausers to sign it. These are the same fraudulent representations that are the foundation for this action. That the legal theories employed or remedies sought may differ in each of the actions is not relevant to a transactional analysis of the claims. Menard,
¶ 32. However, although we have concluded that all the elements of claim preclusion are met, this action will not be barred unless the Wickenhausers' claim was a common-law compulsory counterclaim because in Wisconsin, with this one narrow exception, counterclaims are permissive. Wis. Stat. § 802.07(1); Menard,
¶ 34. Subsequently, ABCG brought an action against First Bank, alleging misrepresentations as to the investment quality, breach of contract regarding schedules for payments and extension of additional credit, and failure to properly manage the properties. Id. at 471-72. Under those circumstances, we determined that a judgment in favor of ABCG would "directly undermine" the original default judgments in which the court foreclosed ABCG's interest in the properties. Id. at 483. Accordingly, the common-law compulsory counterclaim rule precluded ABCG's action. Id.
¶ 35. Similarly, in Menard, we concluded that Menard's action was barred by the common-law compulsory counterclaim rule because allowing Menard to recover would "undermine" Liteway Lighting Product's (Liteway) original judgment. Menard,
¶ 36. Because of the collateral consequences that Menard's claims could have had on the judgment in the first action, we held that the common-law compulsory counterclaim rule barred Menard's subsequent suit for credit for the returned goods. Id., ¶ 20. We stated, "Menard's claims fall under the common-law compulsory counterclaim rule because allowing Menard to proceed with its present suit would impair Liteway's rights as determined in the original action and would undermine the validity of the judgment Liteway obtained." Id., ¶ 22.
¶ 37. In contrast to A.B.C.G. and Menard, in Schwabe, we concluded that because judgment was rendered in favor of the Schwabes as defendants in the first action based on the affirmative defense of fraud, the Schwabes were not required to have counterclaimed in the first action. Schwabe,
Where the same facts constitute a defense to the plaintiffs claim and also a ground for counterclaim, and*66 the defendant sets up these facts as a defense but not as a counterclaim, and after litigation of the defense judgment is given for the defendant, the defendant is not precluded from maintaining a subsequent action against the plaintiff based upon these facts. In such a case he is not improperly splitting his cause of action ..., although he uses the same facts first as a defense to the plaintiffs claim and later as the basis of an action against the plaintiff. In the subsequent action, the judgment in the prior action is conclusive as to the facts actually litigated and determined in the first action.
However, we also explained in Schwabe that where the plaintiff in the second action lost in the first action, he or she is barred from commencing a new action. Schwabe,
¶ 38. The Wickenhausers' action is not barred by the common-law compulsory counterclaim rule because, as with Schwabe, this second action does not nullify the first judgment or impair any rights established in that action. In the first action, the Wickenhausers were successful in their affirmative defense based on fraud. This action for damages is based on the same fraud that was proven in the first action. The Wickenhausers are not attacking factual findings or legal conclusions previously determined. Accordingly, the Wickenhausers were not required to have counterclaimed in the first action under the common-law compulsory counterclaim rule; and therefore, they are not precluded from seeking damages in this second action.
D. Economic Loss Doctrine
¶ 39. The Wickenhausers contend that because a contract to lend money was the basis for their relation
¶ 40. In Kaloti, we adopted a narrow fraud in the inducement exception to the economic loss doctrine. Kaloti,
¶ 41. In the case before us, the Wickenhausers have stated a claim for intentional misrepresentation. Second, the misrepresentation occurred before the option was executed because the circuit court in the first action concluded Lehtinen's fraudulent misrepresentations, including the reasons Lehtinen wanted the option and his assurances that he would not record the option, misled the Wickenhausers into signing it.
¶ 42. Furthermore, we recognize that certain policy concerns articulated in Kaloti are pertinent to this case. In Kaloti, we explained that" 'Wisconsin has a long-standing principle that parties need a background of truth and fair dealing in commercial relationships.' Where the matter in question falls outside the contract, courts should be able to address a party's failure to act honestly with tort law, even if the parties are engaging in a commercial transaction." Id., ¶ 47 (quoting Van Lare v. Vogt, Inc.,
III. CONCLUSION
¶ 44. We conclude that the election of remedies doctrine does not bar the Wickenhausers from obtaining damages in this action because rescission of the option in the prior action is consistent with the subsequent award of damages. Furthermore, their claim in
By the Court. — The decision of the court of appeals is reversed and the cause remanded to the court of appeals.
Notes
The Honorable Eric J. Lundell, Circuit Court Judge for St. Croix County, presided.
A claim for relief in tort and a claim for relief in contract are not "remedies" to which the election of remedies doctrine applies. Goetz v. State Farm Mut. Auto. Ins. Co.,
One "rescinds" a contract by cancelling it unilaterally or by agreement. Black's Law Dictionary 1332 (8th ed. 2004).
"Rescissory damages" are awarded to return a party to the position that party occupied before the wrongful act. Id. at 419. These damages are sometimes called "restorative damages." Head & Seemann, Inc. v. Gregg,
A party who breaches a contract is obligated to the aggrieved party for "benefit-of-the-bargain" damages "equal to the amounts that the aggrieved party would have received, including profits, if the contract had been fully performed." Black's Law Dictionary 416 (8th ed. 2004).
See also 2 Dan B. Dobbs, Dobbs Law of Remedies § 9.4, at 612 n.38 (2d ed. 1993) (stating that Head & Seemann, Inc. v. Gregg,
See, e.g., DePratt v. W. Bend Mut. Ins. Co.,
Landess v. Schmidt, 115 Wis. 2d 186,
See, e.g., Vukelic v. Upper Third St. Sav. & Loan Ass'n,
Wisconsin Stat. §802.07(1) provides, in pertinent part: "A defendant may counterclaim any claim which the defendant has against a plaintiff, upon which a judgment may be had in the action." (Emphasis added.)
All subsequent references to the Wisconsin Statutes are to the 2005-06 version unless otherwise indicated.
In A.B.C.G. Enterprises, Inc. v. First Bank Southeast, N.A.,
(2) A defendant who may interpose a claim as a counterclaim in an action but fails to do so is precluded, after the rendition of judgment in that action, from maintaining an action on the claim if:
(b) The relationship between the counterclaim and the plaintiffs claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action.
We note that Wisconsin case law provides that the requirement of identity of parties is met when" 'the two actions involve a closely-held corporation in one case ... and its principal shareholder in the other.'" Manu-Tronics,
No argument was presented to us contending that the relationship between the Nielsens and Lehtinen rises to the level of privities, and therefore, we do not address this issue. However, we note that "[plrivity exists when a person is so identified in interest with a party to former litigation that he or she represents precisely the same legal right in respect to the subject matter involved." Pasko v. City of Milwaukee,
Even though Lehtinen acknowledges the findings in the first action, he argues in his brief that the fraud did not precede the contract in this case because the option was signed on January 14, 1998 and the Wickenhausers testified they did not discuss the option, nor had they seen it, prior to that date. However, we do not believe the fact that the Wickenhausers did not discuss the option prior to that date means Lehtinen's misrepresentations were not made prior to when the Wicken-hausers signed the contract. Common sense dictates that since the misrepresentations fraudulently induced the Wickenhaus-ers to sign the option, those misrepresentations necessarily occurred prior to when the option was formed.
The concurrence inaccurately asserts, "the majority opinion extends the economic loss doctrine to the present case beyond any case this court has decided." Concurrence, ¶ 51. The concurrence then spends ¶¶ 51-63 explaining why we
Concurrence Opinion
¶ 45. {concurring). I agree with the majority opinion that the Wickenhausers have a claim for intentional misrepresentation and are not barred by the election of remedies in pursuing it. I cannot, however, join the majority opinion's discussion of the economic loss doctrine for two reasons:
I. The majority opinion's discussion of the economic loss doctrine ignores the parties' arguments and decides the application of the economic loss doctrine to the present case — an issue that the parties did not raise or brief.
II. Without briefs or argument by the parties and without analysis, the majority opinion extends the economic loss doctrine to the present case, beyond any ease this court has decided.
r-i
¶ 46. The parties agree that the economic loss doctrine does not apply in the present case.
¶ 48. The Wickenhausers argue that if this court holds that they have made an election of remedies and chosen contract remedies, then the court should adopt a fraud-in-the-inducement-like exception to the election of remedies doctrine, like the Kaloti
¶ 49. Because the majority opinion holds that the election of remedies doctrine does not apply to the present case, no discussion of a fraud-in-the-inducement-like exception to the election of remedies is needed.
¶ 50. Because the majority opinion ignores the parties' arguments and needlessly reaches the application of the economic loss doctrine to the facts of the present case, I do not join the majority opinion's discussion of the economic loss doctrine.
¶ 51. Furthermore, without briefs or argument by the parties and without any analysis, the majority opinion extends the economic loss doctrine to the present case beyond any case this court has decided.
¶ 52. An unstated premise underlying the majority opinion's discussion of the economic loss doctrine is that the economic loss doctrine applies to the present case, that is, it applies to a noncommercial real estate transaction in which a party claims intentional misrepresentation and in which at least one party was not sophisticated and was not represented by counsel during negotiations. The majority opinion cites no case supporting its unstated premise.
¶ 53. This court has not decided whether the economic loss doctrine covers all real estate transactions.
¶ 54. A short history of the economic loss doctrine demonstrates the point. The economic loss doctrine is a judicially created doctrine that, in theory, seeks to preserve the distinction between contract law and tort law because "contract law and the law of warranty, in particular, is better suited than tort law for dealing with purely economic loss in the commercial arena."
¶ 55. In prior cases, the court has broadened the economic loss doctrine from addressing "damages resulting from inadequate value because the product is inferior and does not work for the general purposes for which it was manufactured and sold" in a commercial transaction
¶ 56. In Mose v. Tedco Equities-Potter Road Ltd. Partnership,
¶ 57. Kailin v. Armstrong,
¶ 58. Although the court of appeals seemed to be on its way to extend the economic loss doctrine to all
¶ 59. Referring to the Mose and Kailin cases as addressing whether the economic loss doctrine applies to commercial real estate contracts, this court in Van Lare refused to decide whether the economic loss doctrine applies to all real estate transactions. Specifically, the Van Lare court announced that "we do not decide today whether the broader conceptualization of the economic loss doctrine in Tietsworth covers all real estate transactions . . .." Van Lare,
¶ 60. The Van Lare court applied the economic loss doctrine only to commercial real estate transactions negotiated at arms' length between two sophisticated parties represented by counsel during a negotiation process that resulted in a written bargained-for contract, when the complainant alleged strict liability misrepresentation. The Van Lare court concluded that applying the economic loss doctrine in such a case furthers the policies that justify the doctrine's existence. Van Lare,
¶ 61. Thus, the Van Lare court left open the question of the extension of the economic loss doctrine in real estate transactions to noncommercial transactions, to claims of intentional misrepresentation, to transactions between unsophisticated parties negotiating without counsel, and to transactions with an oral agreement or with a not-fully-bargained-for agreement.
¶ 63. The next case of interest is Linden v. Cascade Stone Co., Inc.,
¶ 64. In deciding whether the economic loss doctrine applied to the contract for construction of a house, the Linden court described how "[s]ome contracts encompass both products and services. We use the predominant purpose test to determine whether a mixed contract for products and services is predominantly a sale of a product and therefore subject to the economic loss doctrine, or predominantly a contract for services and therefore not subject to the economic loss doctrine . . . ." Linden,
¶ 65. The Linden court concluded "that under the totality of circumstances, the predominant purpose of the contract was for a product, a new house, rather than one for services." Linden,
[t]he predominant purpose test was developed in the Uniform Commercial Code (UCC) context when contracts that were alleged to be sales (Wis. Stat. ch. 402) occurred. Because the sales chapter of the UCC applies to transactions in goods, Wis. Stat. § 402.102, and many contracts involved both goods and services, it was necessary to determine which component was predominant.
Linden,
¶ 67. Linden applies to a construction contract, a contract involving goods and services, not to a contract for a real estate transaction as the phrase "real estate transaction" is used in Mose, Kailin, Van Lare, and the present case.
¶ 68. Without briefs from the parties on the issue of whether the economic loss doctrine should be extended beyond Van Lare to the type of real estate transaction at issue in the instant case or the claim of intentional misrepresentation, the majority opinion holds that the economic loss doctrine is applicable to the present noncommercial real estate transaction in
¶ 69. Irrespective of the fraud-in-the-inducement exception to the economic loss doctrine that the majority opinion applies, I conclude that the Wickenhausers have a claim for intentional misrepresentation. Wisconsin law has recognized that one who intentionally deceives another with the intent and effect of inducing reliance to the other's detriment will be liable in tort.
¶ 70. For the reason set forth, I write separately.
¶ 71. I am authorized to state that Justices ANN WALSH BRADLEY and LOUIS B. BUTLER, JR. join this opinion.
Defendant's-Appellants' (Lehtinens1) Response Brief and Appendix at 26.
Kaloti Enters., Inc. v. Kellogg Sales Co.,
Reply Brief of Wickenhausers at 13-14 ('Wickenhausers acknowledged that cases involving the economic loss doctrine arise from a contract for the sale of goods. That did not occur here. However, the principle [of fraud in the inducement] is what is important: when deliberate misrepresentation induces another into a transaction with a false sense of the risks, duties or obligations involved, the party so induced is able to pursue damages.").
Daanen & Janssen, Inc. v. Cedarapids, Inc.,
Id. at 400-01 (internal quotation marks omitted) (remote commercial purchaser); Sunnyslope Grading, Inc. v. Miller,
State Farm Mut. Auto. Ins. Co. v. Ford Motor Co.,
Other cases have addressed the application of the economic loss doctrine in contracts for services and in mixed contracts for services and products. See Ins. Co. of N. Am. v. Cease Elec. Inc.,
The Van Lare court cited, but without comment, the court of appeals certification memorandum suggesting that "strict
Kaloti,
Specifically, the three questions before the Linden court were:
(1) whether a general contract to complete a described project, whereunder the general contractor subcontracts with others to assist in completing the project and a claim is made for negligent services provided by the subcontractors, controls the analysis of whether the contract is primarily for goods or primarily for services; (2) whether an objective test should be used by Wisconsin courts to determine if the predominant purpose of a mixed contract was for the sale of a product or to provide services; and (3) whether the "integrated system limitation" of the "other property exception" to the economic loss doctrine applies to bar a negligence claim against a subcontractor who provided services in the construction of a house.
The Linden court examined Van Sistine v. Tollard,
