It is not uncommon for ownership to change multiple times soon after the purchase of property. For instance, a group of related companies might have one entity purchase undeveloped property, transfer ownership after purchase to another entity to construct buildings or otherwise develop the property, and transfer ownership again upon completion of construction to a third entity that will manage the property. As another example, one company might buy an office building and then engage in an immediate sale-leaseback agreement with another entity. There are numerous tax, organizational, and strategic reasons why ownership can change shortly after property is purchased, and the reasons only multiply as time passes. But what if the first entity that bought the property was defrauded by the original owner, and the fraud was not discovered until ownership had changed hands? Which companies in the chain of ownership have standing to bring misrepresentation claims? A recent Wisconsin Court of Appeals decision provides guidance on that question.
In Pagoudis v. Keidl, Pagoudis bought property from Keidl, relying upon a condition report provided by Keidl in connection with the sale. The offer to purchase indicated that the buyer was Pagoudis “or his assigns.” At the time of closing, Sead Properties, LLC, a company owned by Pagoudis, ultimately purchased the property. Several months later, Sead transferred the property to Kearns Management, LLC, another company owned by Pagoudis. After Kearns discovered undisclosed defects in the property, Pagoudis, Sead and Kearns all sued Keidl for breach of contract and various forms of common-law and statutory misrepresentation.
Keidl moved to dismiss, arguing that none of the three plaintiffs had standing to sue. Pagoudis and Sead lacked standing, Keidl argued, because they were not the owners of the property. Kearns lacked standing, Keidl argued, because Kearns was not a party to the original transaction in which the fraud allegedly occurred. The circuit court agreed, holding that Keidl’s alleged misrepresentations “do not follow the property through to subsequent owners.” As a result, the claims of all three plaintiffs were dismissed. The plaintiffs appealed.
In a lengthy and thoughtful opinion, the Wisconsin Court of Appeals reversed the dismissals and remanded for further proceedings. The court explained that a party has standing if they have suffered or are threatened with an injury for which the law provides a remedy. The concept of standing bars lawsuits by strangers to the dispute, who have no personal interest in the outcome, and suits that involve injuries for which the law does not provide a remedy, such as hypothetical injuries or injuries that are real but not legally remedial (e.g., hurt pride).
That said, the court explained, standing is not a “gotcha” game that stands in the way of parties who have been injured. Instead, Wisconsin law favors a broad construction of standing that allows those who have been harmed to access the courts and obtain a remedy. So the conclusion that nobody has standing to pursue fraud allegedly committed by Keidl is not a result that should be quickly or easily reached. The appeals court examined each of the three plaintiffs and found that, depending on facts that were not yet developed, each of the three might have standing to sue.
First, it was not at all clear what role Pagoudis played in the purchase. Was Pagoudis a purchaser in his own right who assigned or transferred the property to Sead, or was he a mere assignee for Sead, standing in Sead’s shoes? If Pagoudis was a mere assignee for Sead, then Pagoudis legally was Sead, and any misrepresentation to Pagoudis was a misrepresentation to Sead. If Pagoudis was a purchaser in his own right or Pagoudis had some other theory under which he was injured, then Pagoudis might have standing to sue. The court held that the record before it was too unclear to resolve that question.
Second, the appeals court concluded that Sead did not necessarily lose its standing to sue Keidl when the property was transferred to Kearns. The court gave many hypothetical examples of how a party could be injured even though it no longer owned the property in question. For instance, Sead might have sold the property to Kearns for less than Sead paid for it because the defect (if it was unknown to Sead at the time of the original purchase but discovered before the transfer to Kearns) reduced the property’s value. Or Sead could have agreed to indemnify Kearns for any defect in the property, in which case Sead could properly look to Keidl to cover any liability Sead had to Kearns. And even if Sead transferred the property to Kearns without receiving anything in exchange, Sead could still have been injured because Sead received property that was less valuable than what Sead was promised. In other words, “gifting” the property to Kearns would not necessarily negate Sead’s injury, so Sead may have retained standing. The facts again were too unclear to know for sure.
Third, the court concluded that Kearns may have standing because the law in certain circumstances permits recovery for “indirect” misrepresentations (meaning misrepresentations made to one party that are relied upon by another party). If Keidl misrepresented the state of the property to Sead, and Sead passed on this misrepresentation to Kearns (not knowing it was false), Keidl may be liable to Kearns for misrepresenting the state of the property to Sead. Not all causes of action permit indirect misrepresentation (for instance, strict liability misrepresentation cannot be indirect), but some causes of action potentially may allow an indirect misrepresentation to be actionable. And further, Keidl should have reasonably expected that any misrepresentation to Pagoudis could have led to injury to any entity that Pagoudis owned.
The record was not sufficiently developed to decide definitely which of Pagoudis, Sead or Kearns had standing to sue. The appeals court concluded that the circuit court had been “unduly rigid” in its standing analysis, and should have allowed the facts to develop further before dismissing the claims of all three plaintiffs. Thus, the appeals court reversed the dismissal and remanded the action for further proceedings, allowing Pagoudis, Sead and Kearns to proceed with their cases.
Standing can be a tricky issue, but the clear upside of Pagoudis is that transfer of ownerships does not automatically defeat misrepresentation claims. Parties who believe they have been injured by a misrepresentation made to a prior owner may be able to obtain relief in court, but careful analysis of the facts is required before a decision to sue is made.
If you have would like KMK to review whether you have viable misrepresentation claims or have been sued by a party claiming fraud, please contact KMK Attorney Ryan M. Billings at (414) 962-5110 or firstname.lastname@example.org.