In Commercial Real Estate Transactions, Limited Liability May Not Be So Limited

August 12, 2013

One of the reasons individuals own their investment real estate through a corporation or limited liability company is to take advantage of the limited liability those entities provide. However, in certain circumstances the liability may not be limited at all, and the individuals could be held personally accountable for certain actions.

The economic loss doctrine (“ELD”) is a rule created by the courts which prevents a party to a contract from claiming a tort cause of action against the other party to the contract if the damages the party seeks are associated with the contract and are purely economic or commercial in nature. Such tort causes of action include negligent misrepresentation and intentional misrepresentation. The ELD requires that the transacting parties pursue only their contractual remedies against each other when asserting an economic loss claim.

Through a series of cases, the Wisconsin courts have held the ELD prohibits tort causes of action in commercial real estate transactions. An exception to that prohibition exists where there is an unrelated fraud that induces a party to enter into the contract.

While the ELD precludes tort causes of action in commercial real estate transactions, it does not, however, prevent actions based upon a statute. As such, statutory causes of action, including those based upon Sec. 895.446, can be asserted by a party to a commercial real estate transaction, even though they are based upon misrepresentations which would otherwise be barred.

Sec. 895.446 provides that any person who suffers damage or loss by reason of certain intentional conduct has a statutory cause of action against the person who caused the damage or loss. The intentional conduct includes certain damages to property, certain thefts, certain frauds, worthless checks, and receiving stolen property. A successful party is permitted to recover actual damages, all costs of investigation and litigation (which includes attorneys’ fees), and an additional amount that is no more than three times the actual damages. Courts have included certain intentional misrepresentations in the causes of action allowed under this statute.

In Ferris v. Location 3 Corp., 2011 WI App 134, 337 Wis. 2d 155, 804 N.W.2d 822 (petition for review denied), the Wisconsin Court of Appeals held that a claim pursuant to Sec. 895.446 is not barred by the ELD, even though the claim is based upon an intentional misrepresentation. The court also held that the agents of a corporation (such as its shareholders) could be held personally liable for their tortious conduct, regardless of whether or not they acted on behalf of the corporation. Therefore, a party to a commercial real estate transaction can be sued for certain intentional conduct despite the ELD, and, if found liable, could be responsible for three times the damages plus attorneys’ fees. Furthermore, that liability may not be limited to only the corporation or limited liability company, as the principals may be held personally responsible for their conduct as well.

Parties to commercial real estate transactions should be aware of these risks. They may be able to negotiate language in their contract to limit or waive these statutory causes of action. While the courts have not addressed whether such a limitation or waiver is enforceable, it is something that should be considered in the appropriate circumstances.

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