S and C Bank v Wisconsin Community Bank (WI)


747 NW2d 527 (Wis Ct App 2008)

Facts: In 1999, Wisconsin Community Bank extended a $1.5 million loan and a $1.8 million line of credit to two companies (collectively, Lotz) owned and operated by the same principals. The principals signed guarantees on the loans in their capacity as officers of Lotz and contingent on a Lotz debt equity ratio greater than 4:1, and refused to sign personal guarantees. In 2001, Community loaned another $2.3 million. Shortly afterwards, Community requested the principals sign a personal guarantee which would come into effect automatically if the debt ratio exceeded 4:1 (a springing guarantee). The credit line was continued in 2002 without Community obtaining the springing guarantee.

In October 2002, S & C purchased Community from its parent company and chose which loans to take with warranty, electing to include the Lotz loans. While preparing for closing, an S & C employee was told that the Lotz loans were personally guaranteed even though they were not. After the completion of the sale, Lotz requested an additional loan. S & C discovered the lack of personal guarantees and ultimately sold Lotz as a going concern for roughly $750,000.

S & C brought suit against Community, alleging that they had misrepresented their warranty by not disclosing the lack of personal guarantees on the Lotz loans, and brought tort claims for negligent, strict liability, and intentional misrepresentation. The trial court found for S & C on breach of warranty and negligent and strict liability misrepresentation, but rejected an intentional misrepresentation claim, ultimately awarding S & C $2.1 million against Community and its parent company.

Holding: Affirmed in part, reversed and remanded in part.

On appeal the court held that the tort claims were barred by the economic loss doctrine. The economic loss doctrine is designed to preserve the line between contract and tort law, recognizing that purely economic loss in the commercial arena is best suited to contract law because the parties had the option to allocate risk. When society has no special interest in overturning the negotiated risk between parties, the economic loss doctrine will bar tort recovery. While a fraud in the inducement exception to the doctrine exists, it requires the fraud not be part of the interwoven elements of the contract, which the warranty on the loans clearly sits within.

In regards to S & C's contractual breach of warranty claim, the court upheld the trial court's ruling that because S & C extended a loan to Lotz without following its own procedures (by dispersing without obtaining the personal guarantees required by its loan commission's recommendation) it had violated the warranty.

Opinion Year: 
By: ATG Underwriting Department | Posted on: Wed, 09/03/2008 - 3:00pm