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Wisconsin Supreme Court Rejects Punitive Damages Award in Construction Loan Case

construction loanIn an action by a general contractor against a bank arising out of a construction loan, the Wisconsin Supreme Court recently held that: (1) the trial court properly exercised its discretion when it imposed a default judgment against the defendant bank as a sanction for discovery violations; (2) the damages award for unjust enrichment was in error because Wisconsin law does not permit recovery of damages for both breach of contract and unjust enrichment arising from the same conduct; and (3) the punitive damages award must be set aside because it was based upon an award of damages for the contract claims and punitive damages are recoverable only in tort.

A copy of the opinion in Mohns Inc. v. BMO Harris Bank Nat’l Ass’n is available at:  Link to Opinion.

In February 2016, the plaintiff general contractor filed a complaint against the defendant bank, alleging three causes of action: (1) the defendant breached its contract to pay the plaintiff for its work on a condominium construction project; (2) the defendant was unjustly enriched by the construction work the plaintiff provided on the condominium project, which increased the value of the loan sold by the defendant; and (3) the defendant misrepresented to the plaintiff that funds were available to pay it for the work it performed on the project, which the defendant would pay the plaintiff if it continued constructing the condominiums. The complaint alleged that if the plaintiff proved the misrepresentation “was intentional and/or in reckless disregard of [the plaintiff’s] rights,” the plaintiff should receive punitive damages.

In its Aug. 29, 2017 written order, the trial court: 

  • Reaffirmed its earlier ruling denying the defendant’s summary judgment motion; 
  • Granted the plaintiff’s requests for discovery sanctions; 
  • Granted judgment to the plaintiff as to the liability of the defendant, including the defendant’s liability for intentional misrepresentation; 
  • Because of the defendant’s conduct regarding discovery and its disregard for the trial court’s orders, granted judgment to the plaintiff for its attorneys’ fees in an amount to be determined by the court; 
  • Kept the case scheduled for trial but stated that the issues to be tried will be the damages and punitive damages to be assessed against the defendant.

The case proceeded to trial in October 2017 as scheduled. The jury awarded the plaintiff general contractor $106,581 for the defendant bank’s breach of contract, $132,668 for the defendant bank’s unjust enrichment, and $1 million for punitive damages. The trial court eventually lowered the punitive damages to $458,484.

The defendant bank appealed the trial court’s order to the court of appeals. The court of appeals affirmed, ruling that the trial court properly exercised its discretion in imposing judgment on liability against the defendant as a discovery sanction based on the defendant’s egregious conduct. However, the court of appeals did not address the merits of the defendant bank’s arguments on contract and unjust enrichment claims being mutually exclusive or the punitive damages award resting entirely on contract. In its view, the defendant bank failed to adequately raise or brief these issues.

The defendant bank timely appealed to the Wisconsin Supreme Court.

The defendant bank argued that the court of appeals erred in affirming the trial court on three grounds: (1) the trial court erroneously exercised its discretion in imposing default judgment as a discovery sanction because this sanction is too severe and because the trial court did not find that the plaintiff was prejudiced by the defendant’s violations; (2) Wisconsin law does not permit a plaintiff to recover damages for both breach of contract and unjust enrichment; and (3) the punitive damages award was based on contract rather than tort.

The Wisconsin Supreme Court reviews discovery sanctions under the erroneous exercise of discretion standard. See Industrial Roofing Serv. v. Marquardt, 2007 WI 19, ¶41, 299 Wis. 2d 81, 726 N.W.2d 898. If the trial court “examined the relevant facts, applied a proper standard of law, and, using a demonstrated rational process, reached a conclusion that a reasonable judge could reach,” the Court upholds the decision. Id. The Court’s review of whether a party may recover damages for both breach of contract and unjust enrichment and whether the punitive damages award was permitted here presented questions of law the Court reviewed de novo. Miller v. Wal-Mart Stores, Inc., 219 Wis. 2d 250, 259, 580 N.W.2d 233 (1998).

First, the Supreme Court noted that it has specifically declined to require prejudice to the offended party when default judgment is imposed as a discovery sanction. See Industrial Roofing Serv., 299 Wis. 2d 81, ¶43; Johnson v. Allis Chalmers Corp., 162 Wis. 2d 261, 282, 470 N.W.2d 859 (1991). The Court remarked that, as a result of their behavior, parties acting egregiously or in bad faith “significant[ly] prejudice… the [trial] court’s ability to efficiently and effectively administer judicial business.” Johnson, 162 Wis. 2d at 282. “[I]n some cases the need to punish and deter the flagrant disobedience of court orders requires the [trial] court to impose greater sanctions than monetary ones.” Id. at 286.

The trial court found the defendant bank’s discovery conduct to be egregious, disingenuous, designed to bury documents and hide a “smoking gun” email, and in violation of its discovery order. The Supreme Court determined that those findings were not clearly erroneous, as the record contained evidence supporting them. “[F]ailure to comply with [trial] court scheduling and discovery orders without clear and justifiable excuse is egregious conduct.” Industrial Roofing Serv., 299 Wis. 2d 81, ¶43

Based on the trial court’s warnings to the defendant bank, the defendant bank’s refusal to obey the court’s discovery order, the court’s findings of egregiousness, and the availability of a default judgment sanction under Wis. Stat. § 804.12(2), the Supreme Court held that the trial court’s decision to impose the sanction was a reasoned determination. Accordingly, the Court concluded that the trial court did not erroneously exercise its discretion and affirmed the court of appeals’ decision regarding the discovery sanctions.

However, the Supreme Court also held that the court of appeals erred in upholding the jury’s verdict awarding damages to the plaintiff general contractor for both breach of contract and unjust enrichment.

The Supreme Court stated that, under Wisconsin law, a plaintiff may not recover damages for both breach of contract and unjust enrichment based on the same conduct. See Meyer v. The Laser Vision Inst., LLC, 2006 WI App 70, ¶26, 290 Wis. 2d 764, 714 N.W.2d 223. The Court reasoned that unjust enrichment is an equitable claim that cannot coexist with a breach of contract claim. Id., ¶28. The Court also pointed out that if the parties entered into a valid, enforceable contract, then unjust enrichment does not apply. Continental Cas. Co. v. Wisconsin Patients Comp. Fund, 164 Wis.2d 110, 118, 473 N.W.2d 584 (Ct. App. 1991).

Because the trial court found a contract did exist here, and because the jury awarded damages for the defendant bank’s breach of the contract, the Supreme Court concluded that the award for damages based on unjust enrichment must be set aside. The Court clarified that a party may plead claims for relief in the alternative, as the plaintiff did in this case, Wis. Stat. § 802.02(5)(b), but that the party may recover under only one of the claims.

Finally, the Supreme Court observed that punitive damages are not available as a remedy in a breach of contract action in Wisconsin. Entzminger v. Ford Motor Co., 47 Wis. 2d 751, 757, 177 N.W.2d 899 (1970). Instead, the Court made clear that a jury’s award of punitive damages must be based upon a finding of tort liability. Hansen v. Texas Roadhouse, Inc., 2013 WI App 2, ¶29, 345 Wis. 2d 669, 827 N.W.2d 99.

The punitive damages questions before the jury in this case did not reference tort liability. Instead, the punitive damages awarded by the jury were based on the amounts they awarded for the defendant bank’s breach of contract and unjust enrichment claims. Therefore, the Supreme Court held that the punitive damages award must be set aside.

Accordingly, the Wisconsin Supreme Court held that the trial court did not erroneously exercise its discretion when it granted default judgment against the defendant as a discovery sanction.

However, the Court also concluded that Wisconsin law does not permit a plaintiff to recover simultaneously for breach of contract and unjust enrichment based on the same conduct or subject matter and that the jury’s award for unjust enrichment must be set aside here. Additionally, the Court determined that Wisconsin law only permits a punitive damages award to be based upon a tort, not a contract, and so the punitive damages award here must also be set aside.

Thus, the Court affirmed in part and reversed in part the decision of the court of appeals and remanded the case to the trial court for further proceedings consistent with this opinion.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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