By: dmc-admin//December 20, 2006//
The economic loss doctrine does not bar a claim for mal-icious injury to business, the Wisconsin Supreme Court held on Dec. 13.
The holding affirms a decision of the court of appeals, Brew City Development Group, LLC, v. The Ferchill Group, 2006 WI App 39, 289 Wis.2d 795, but on different grounds.
The Pabst Brewing Companys downtown Milwaukee brewery, consisting of 27 buildings, closed in 1996.
Brew City Development Group, LLC, whose president and CEO is James Haertel, acquired the right to purchase the property. On June 5, 2002, Brew City assigned that right to Wispark, LLC. According to Brew Citys complaint, Jerold Franke is Wis-parks president.
The assignment agreement provided, among other provisions, as follows:
iBrew City assigned to Wispark its contractual right to buy the Pabst property;
iUpon its acquisition of the property, Wispark was to convey to Brew City title to Buildings 27, 28, and 35 on the property;
iThe development of buildings 27, 28, and 35 would be subject to mutually agreeable restrictive covenants, and in accordance with master planning considerations for the property;
iWispark was to employ Haertel as a consultant for two years after Wispark acquired the property;
iWispark was to provide Brew City with up to ten percent of the environmental remediation credit that Wispark would receive from Pabst as reimbursement for Brew Citys environmental remediation of buildings 27, 28, and 35;
iBrew City acknowledged that Wispark intended to create a new entity to own the Pabst property; and
iBrew City was to receive a 5 percent ownership in the new entity.
Juneau Avenue Partners (Juneau) was created as the new entity to own the Pabst property. According to the complaint: Juneau is a joint venture between JTMK-Pabst and Highland Best; JTMK-Pabst is an affiliate of the Ferchill Group; Wispark is the sole member of Highland Best; John Ferchill is president and CEO of the Ferchill Group, and a member of JTMK-Pabst; and at a Sept. 10, 2002, closing, Juneau purchased the property from Pabst.
After the closing, Brew City and Juneau were unable to agree on the restrictive covenants and easements for buildings 27, 28, and 35, and the nature of Brew Citys 5 percent equity interest in Juneau.
Brew City filed suit against all the other entities involved in the deal, and against Ferchill and Franke individually, alleging assorted claims for relief, including malicious injury to business under sec. 134.01, and conspiracy to interfere with contract.
Milwaukee County Circuit Court Judge Richard J. Sankovitz dismissed all the claims, either with or without prejudice.
The court of appeals reversed the dismissal with prejudice of the sec. 134.01 claim, and the dismissal with prejudice of the conspiracy claims.
What the court held Case: Brew City Redevelopment Group, LLC, v. The Ferchill Group, No. 2004AP3238 Issue: Does the economic loss doctrine bar a claim pursuant to sec. 134.01? Can members of an LLC be named as defendants in a suit against the LLC? Holding: No. A claim under sec. 134.01 can exist independent of a contract, so the doctrine is inapplicable. Yes. Members and managers can be individually liable for criminal acts. Attorneys: For Appellant: Cannon, William M., Brookfield; Robinson, Edward E., Brookfield; Kaas, Sarah E., Brookfield; Eckstein, Brett A., Brookfield; For Respondent: Friebert, Robert H., Milwaukee; O’Neill, Matthew W., Milwaukee; Stoll, R. Ryan, Chicago, IL. |
The Supreme Court granted review, and affirmed, in a decision by Justice Ann Walsh Bradley.
Section 134.01
The court first held that the sec. 134.01 claims were not barred by the economic loss doctrine.
In relevant part, the statute provides criminal liability against any group of persons who shall combine, associate, agree, mutually undertake or concert together for the purpose of willfully or maliciously injuring another in his or her reputation, trade, business or profession.
The court of appeals had concluded that the sec. 134.01 claim was not barred by the doctrine, by recognizing a malevolent action exception, but the Supreme Court rejected that basis. Instead, the court held that no exception need be created, because three factors render the doctrine inapplicable in the first place: sec. 134.01 claims do not depend on a contract; the allegations underlying the claim are different allegations than those underlying the breach of contract claims; and the damages are different.
Addressing the first factor, the court observed, The malicious injury to reputation and business claim in this case could have occurred regardless of whether the June 5 assignment agreement ever existed. We see no reason why the economic loss doctrine should apply to, or bar recovery for, a claim that does not depend on a contract in order to lie.
Turning to the second, the court found that the allegations consist of actions disparaging Haertls abilities, and interfering with a potential lessee of Brew City. The allegations relevant to the breach of contract actions, in contrast, concern failure to convey property, rather than harms to Brew Citys reputation and business.
Addressing the third factor, damages, the court noted that the complaint alleges that Brew City sustained financial and other injuries in addition to those from the breach of contract.
Accordingly, the court held that the economic loss doctrine does not bar the claim.
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Interference With Contract
The court next held that Ferchill and Franke could be liable for intentional interference with contract, despite being members and managers of the LLC defendants.
Although sec. 183.0304(1) provides that the liabilities of an LLC are solely the debts of the LLC, it provides an exception: a member or manager may become personally liable by his or her acts or conduct other than as a member or manager.
Because the complaint alleged that they were acting individually, the court held that the claims against them for intentional interference with contract and conspiracy could proceed.
The court also held that the intracorporate conspiracy doctrine did not bar the claims. The doctrine provides that, because of the complete unity of interests between a parent corporation and a wholly-owned subsidiary, they cannot conspire together.
However, the court concluded that the array of entities named as defendants did not have unity of interest. Accordingly, the court affirmed the court of appeals.
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David Ziemer can be reached by email.