CMFG Life Insurance Company v. UBS Securities, LLC
OPINION & ORDER denying as moot 24 Motion to Stay; granting 20 Motion to Dismiss. Signed by District Judge William M. Conley on 7/1/14. (jat)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN
CMFG LIFE INSURANCE COMPANY,
MEMBERS LIFE INSURANCE COMPANY
and CUMIS INSURANCE SOCIETY,
OPINION & ORDER
This civil action is one of a number of similar, relatively recent suits filed by plaintiffs
(collectively, “CUNA Mutual”) to rescind their purchase of various residential mortgagebacked securities (“RMBS”), all of which performed dismally and lost much of their value
during the collapse of the real estate market. CUNA Mutual does not seek relief under the
civil liability provisions of the Securities Act of 1933, 15 U.S.C. § 77a et seq., or under the
fraud provisions of the Wisconsin Uniform Securities Law, Wis. Stat. § 551.501 -- likely
because any such claims are now clearly time-barred. Rather, CUNA Mutual seeks relief in
the form of common law contractual rescission on the grounds of misrepresentation and
mistake, as well as damages for unjust enrichment.
Defendant UBS Securities (“UBS”) now moves to dismiss this case in its entirety
pursuant to Federal Rule of Civil Procedure 12(b)(6). (See dkt. #20.) Although UBS puts
forth numerous grounds for dismissal, its central contention is that CUNA Mutual’s claims
are time-barred. The court agrees with UBS that, under Wisconsin law, CUNA Mutual’s
claims sound in contract; CUNA Mutual cannot invoke the statute of limitations for actions
for relief on grounds of fraud; and the six-year statute of limitations for contract claims
applies to bar this suit as pled. Accordingly, it will grant UBS’s motion to dismiss.1
I. Rescission of Contract on the Grounds of Misrepresentation
In United Vaccines, Inc. v. Diamond Animal Health, Inc., 409 F. Supp. 2d 1083 (W.D.
Wis. 2006), this court held that a claim for contractual rescission based on intentional
misrepresentation sounds in contract under Wisconsin law. Id. at 1094-95. Relying on the
Wisconsin Supreme Court’s decision in First National Bank & Trust Co. of Racine v. Notte, 97
Wis. 2d 207, 293 N.W.2d 530 (1980), and the Seventh Circuit’s decision in HarleyDavidson Motor Co. v. PowerSports, Inc., 319 F.3d 973 (7th Cir. 2003), this court began with
the general proposition “that Wisconsin law recognizes that an action for fraud/intentional
misrepresentation may lie in either contract or tort.” Id. at 1094; see also Harley-Davidson,
319 F. 3d at 986 (“both the laws of contract and tort have recognized a duty not to
fraudulently induce a person into a bargain”).
Considering the bounds of Wisconsin’s
economic loss doctrine, the court determined that a claim for rescission based on intentional
misrepresentation was grounded in contract, not tort. As the Seventh Circuit explained in
The economic loss doctrine is intended to keep a party from
effecting an end run around contract law to recover under tort
law what it could not recover under contract law and through
contract remedies. Here, Harley-Davidson is not seeking to end
run around contract law; rather, it is seeking a remedy expressly
given to it through contract law – rescission of contract as expounded
Defendants have also moved to stay discovery in this case until the court rules on the underlying
Rule 12(b)(6) motion. (See dkt. #24.) In light of this opinion, that motion will be denied as moot.
319 F.3d at 987 (citations and quotations omitted) (emphasis added).
Thus, consistent with both United Vaccines and Harley-Davidson, the court begins here
with the proposition that CUNA Mutual’s claims for rescission seek a contractual remedy
under Wisconsin common law of contract. See also United Vaccines, Inc. v. Diamond Animal
Health, Inc., No. 05-C-604-C, 2006 WL 1666271, at *9 (W.D. Wis. June 12, 2006)
misrepresentation arose “under contract law, as opposed to tort law”).2
The parties do not really disagree that the remedy CUNA Mutual seeks is contractual
and that the present action, therefore, sounds in contract law. Indeed, CUNA Mutual itself
characterizes this case as one for “contractual rescission.” Their positions diverge, however,
as to which statute of limitations applies. Consistent with the contractual nature of CUNA
Mutual’s claim, UBS argues that Wisconsin’s statute of limitations for actions on contract,
Wis. Stat. § 893.43, governs.3 While acknowledging that its claim is a contract claim at its
core, CUNA Mutual contends that Wisconsin’s “miscellaneous” six-year statute of
limitations for “action[s] for relief on the ground of fraud,” Wis. Stat. § 893.93(1)(b),
applies to save its otherwise untimely claim.4
Both § 893.43 and § 893.93(1)(b) prescribe a six-year statute of limitations. The key
difference between the two is when that period begins to run. Section 893.43 does not allow
for the application of the discovery rule, meaning that the six-year limitations period begins
This is also consistent with cases like Kindschuh v. City of Fond du Lac, No. 09-C-214, 2010 WL
1507883, at *5 (applying § 893.43 to claim that intentional misrepresentations induced plaintiff to
sign a settlement agreement).
Section 893.43 provides: “An action upon any contract, obligation or liability, express or implied,
including an action to recover fees for professional services, except those mentioned in § 893.40,
shall be commenced within 6 years after the cause of action accrues or be barred.”
Section 893.93(1)(b) provides in pertinent part that an “action for relief on the ground of fraud”
shall be commenced “within 6 years after the cause of action accrues or be barred.”
to run at the moment of breach. CLL Assocs. Ltd. P’ship v. Arrowhead Pac. Corp., 174 Wis. 2d
604, 497 N.W.2d 115 (1993). Since there is a single RMBS certificate at issue in this case,
which CUNA Mutual purchased from UBS on April 7, 2006 -- more than six years before
CUNA Mutual filed this action on August 15, 2013 -- CUNA Mutual’s claims for rescission
are time-barred if the contract statute of limitations applies. (See Am. Compl. (dkt. #36)
¶ 189.) In contrast, § 893.93(1)(b) provides that an action for relief on the grounds of
fraud “is not deemed to have accrued until the discovery, by the aggrieved party, of the facts
constituting the fraud.” If this statute of limitations applies, therefore, the discovery rule
may save CUNA Mutual’s claims, at least at the motion to dismiss stage.
question, then, is whether CUNA Mutual’s case constitutes an “action for relief on the
ground of fraud,” notwithstanding its contractual nature.
Here, CUNA Mutual’s complaint disavows any claim of intentional misrepresentation
or fraud in its pleadings, leaving it with claims for rescission based on either negligent or
strict responsibility misrepresentation.5 According to UBS, this is fatal to CUNA Mutual’s
claim, because negligent and strict responsibility misrepresentation do not constitute fraud
for § 893.93(1)(b) purposes. In support, UBS points to In re Demos’ Estate, 50 Wis. 2d 262,
184 N.W.2d 117 (1971). In that case, the claimant had filed an action against his brother’s
estate based upon three debts allegedly evidenced in writing. The central issue was whether
the action was time-barred. The Wisconsin Supreme Court began by noting that “since the
appellant is suing on three simple debts which purport to be evidenced in writing, the
Specifically, in Paragraph 126 of its Complaint, CUNA Mutual states that it “is not specifically
alleging that Defendants committed fraud.” (Am. Compl. (dkt. #36) ¶ 126.) To the extent that
CUNA Mutual now argues that it did allege fraud, “the complaint may not be amended by the briefs
in opposition to a motion to dismiss.” Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1107 (7th
section normally applicable would be the six-year provision” for actions upon “any other
contract, obligation or liability, express or implied.”
Id. at 264 (quoting Wis. Stat.
§ 893.19(3) (1971) (current version at Wis. Stat. § 893.43)).
As here, the claimant in
Demos’ Estate argued that his complaint alleged fraud and that the fraud statute of
limitations applied. The Wisconsin Supreme Court disagreed, noting that “[n]owhere in
the complaint is fraud specifically alleged, nor does the complaint state facts, even when
viewed most favorably to the claimant, from which fraud can reasonably be inferred.” Id. at
The Wisconsin Supreme Court went on to discuss the “requisite elements for a cause
of action based on fraud”:
To be actionable the false representation must consist first, of a
statement of fact which is untrue; second, that it was made with
intent to defraud and for the purpose of inducing the other party
to act upon it; third, that he did in fact rely on it and was
induced thereby to act, to hi[s] injury or damage.
Id. (emphasis added) (quoting Int’l Milling Co. v. Priem, 179 Wis. 622, 624, 192 N.W. 68
(1923)). Ultimately, the court found the fraud statute of limitations inapplicable, applied
the contract statute of limitations, and held the action time-barred. Demos’ Estate, therefore,
supports the proposition that “fraud,” as that term is used in Wis. Stat. § 893.93(1)(b),
requires intent, which CUNA Mutual has chosen not to plead. 550 Wis. 2d at 266.
Tellingly, CUNA Mutual fails to address the Wisconsin Supreme Court’s decision in
Demos’ Estate in any way. Instead, it argues that “fraud” encompasses not only intentional
misrepresentation but also negligent or strict responsibility misrepresentation.
argument is premised primarily on general language from Whipp v. Iverson, 43 Wis. 2d 166,
168 N.W.2d 201 (1969). In Whipp, the Wisconsin Supreme Court stated that “[f]raud is a
generic and an ambiguous term” that “embranches misrepresentation which may be
separated into the three familiar tort classifications of intent, negligence, and strict
responsibility.” Id. at 169. Based on this broad observation, CUNA Mutual argues that its
claims are premised “on the ground of fraud,” even though it has not pled intentional
misrepresentation in the inducement of contract.
CUNA Mutual also cites to a number of other cases as applying a broad reading of
“fraud,” although none are particularly helpful in the context of its claim for contractual
rescission based on negligent and strict responsibility misrepresentations.
Haechler, 27 Wis. 2d 275, 276, 133 N.W.2d 730 (1965), applied § 893.93(1)(b) to an
action for contractual rescission where the plaintiff implicitly, if not explicitly, alleged
intentional “fraud.” See id. (“Koehler alleged, in substance, that the 20 shares of stock were
not authorized by law, but had been fraudulently represented as valid. He alleged discovery
of the fraud in October, 1963.”). The Seventh Circuit in Owen v. Wangerin, 985 F.2d 312
(7th Cir. 1993), applied § 893.93(1)(b) to a claim that appears to have blended tort and
contract by seeking both rescission and damages, concluding that it fell into the category of
“suits alleging common law fraud.” Id. at 314-15.6 Lewis v. Paul Revere Life Insurance Co., 80
F. Supp. 2d 978 (E.D. Wis. 2000), is the only case CUNA Mutual offers in which a court
applied Wis. Stat. § 893.93(1)(b) in the context of negligent and strict responsibility
misrepresentation; the problem is that case involved tort claims, not claims seeking
Although CUNA Mutual characterizes Owen as also applying the fraud statute of limitations to
claims for reformation based on mutual mistake, defendant correctly points out that the court did
not actually address which statute of limitations applied to those claims. See Owen, 985 F.2d at 31617.
contractual rescission. Id. at 994; see also Whipp, 43 Wis. 2d at 169 (discussing “three
classifications of torts” (emphasis added)).
Applying a statute of limitations incorporating the discovery rule in the context of
Wisconsin tort claims is hardly surprising. The Wisconsin Supreme Court has “adopt[ed]
the discovery rule for all tort actions other than those already governed by a legislatively
created discovery rule.” Hansen v. A.H. Robins, Inc., 113 Wis. 2d 550, 560, 335 N.W.2d
578 (1983) (emphasis added).
However, the same logic does not necessarily justify
incorporating the discovery rule for contract actions involving allegations of negligent or
strict responsibility misrepresentations. To the contrary, the Wisconsin Supreme Court has
expressly declined to adopt the discovery rule in the contract context, even where a breach is
“in practical terms, undetectable.” CLL Assocs. Ltd. P’ship, 174 Wis. 2d at 613; see also State
v. Chrysler Outboard Corp., 219 Wis. 2d 130, 148, 580 N.W.2d 203 (1998) (“This court has
recently declined to extend the discovery rule to causes of action not sounding in tort.”).7
Furthermore, the court can find no case in which § 893.93(1)(b) applied to an action for
contractual rescission on grounds of negligent or strict responsibility misrepresentation, nor
has CUNA Mutual pointed to any.
CUNA Mutual also relies heavily on Stuart v. Weisflog’s Showroom Gallery, Inc., 2008
WI 22, 308 Wis. 2d 103, 746 N.W.2d 762, but that case is factually inapposite. In Stuart,
a builder intentionally misrepresented the quality of his materials, as well as his familiarity
with local building codes and regulations.
In reliance on these misrepresentations, the
Stuarts retained him to remodel and expand their home. Seven years later, the Stuarts
The language in these cases in particular undermines CUNA Mutual’s argument that it makes little
sense to apply the contracts statute of limitations where misrepresentations are “incapable of
discovery until well after the contract is performed.” (Pl.’s Br. Opp’n (dkt. #31) 23.)
discovered serious construction defects and building code violations and brought claims for
negligent design and construction and claims under the Home Improvement Practices Act
(HIPA), Wis. Admin. Code § ATCP 110, and Wis. Stat. § 100.20(5).
As here, the
defendants in Stuart responded by arguing that these claims were premised on a breach of
the contract between the parties and were barred by the contract statute of limitations.
The Wisconsin Supreme Court disagreed, holding that the Stuarts’ “HIPA claims, in
addition to their claims for negligent design and construction, [were] independent claims
similar to tort claims, which are governed by the discovery rule.” Stuart, 2008 WI 22, at
¶ 15. Moreover, because the HIPA and negligence claims were premised on “allegations of
fraud and misrepresentation,” the court held that § 893.93(1)(b) applied.
Id. at ¶ 18.
Unlike the present case, however, Stuart involved no contract claims at all. See id. at ¶ 8
(“[J]ust before the trial began, the Stuarts dismissed their breach of contract claims.”). In
any event, Stuart is better understood as another example of a case in which Wisconsin
courts applied § 893.93(1)(b) to tort (or at least, tort-like) claims based on intentional
Having reviewed the (admittedly) tangled and arguably inconsistent case law
surrounding this question,9 the court is satisfied that at a minimum, actions for contractual
rescission based on negligent or strict responsibility misrepresentation (1) sound in contract,
not tort, at least under Wisconsin law; and (2) are not actions “on the ground of fraud”
under § 893.93(1)(b).
As an initial matter, Demos’ Estate strongly suggests that it is
See Stuart, 2008 WI 22, at ¶ 24 (“Petitioners made their misrepresentations out ‘of their own
volition and design.’”); see also Stuart v. Weisflog’s Showroom Gallery, Inc., 2008 WI 86, ¶ 28, 311 Wis.
2d 492, 753 N.W.2d 448 (noting that the jury found intent and volition behind the
misrepresentations, such that they could not qualify as accidents).
Cf. Mark P. Gergen, Negligent Misrepresentation as Contract, 101 Cal. L. Rev. 953 (2013).
inappropriate to apply § 893.93(1)(b) to contract cases where there have been no
allegations of intentional misrepresentation. 550 Wis. 2d at 266. Additionally, since the
Wisconsin Supreme Court’s 1969 decision in Whipp, greater care has been taken to
distinguish between fraudulent and so-called material misrepresentations in the rescission
context, suggesting that at least some misrepresentations justifying rescission are not
“fraudulent” -- that is, they are not intentional. In First National Bank & Trust Co. of Racine
v. Notte, Wisconsin’s seminal case on contractual rescission, the Wisconsin Supreme Court
“adopt[ed] the position taken in the Restatement (Second) of Contracts, s 306(1) . . . to
determine when a contract will be deemed voidable and subject to rescission.” Notte, 97
Wis. 2d at 222. As quoted in Notte, that section provides:
When A Misrepresentation Makes A Contract Voidable. (1)
When a party’s manifestation of assent is induced by either a
fraudulent or a material misrepresentation by the other party,
the contract is voidable by the recipient if he is justified in
relying on the misrepresentation.
Id. (quoting Restatement (Second) of Contracts, s 306(1) (Tent. Draft No. 11, 1976)).
If all misrepresentations -- intentional, negligent and strict responsibility -- were
misrepresentations. Not incidentally, this is also the category on which CUNA Mutual’s
pleadings focus. (See, e.g., Am. Compl. (dkt. #36) ¶ 57 (“UBS’s representations that the
relevant Originators complied with their underwriting standards were material to CUNA
Mutual[.]”); id. at ¶ 66 (“For CUNA Mutual, these quantitative loan characteristics were
material[.]”); id. at ¶ 220 (“Representations regarding owner-occupancy status were material
to CUNA Mutual[.]); id. at ¶ 293 (“Each of these representations was material to CUNA
Mutual, because it was likely to and did induce a reasonable investor to purchase the
certificate for the purchase price at the relevant yield.”).) Thus, the court concludes that
CUNA Mutual has not pled an action “for relief on the ground of fraud” and cannot apply
§ 893.93(1)(b), or its discovery rule, to its contract claims.
Of course, if CUNA Mutual’s claims for rescission based on negligent or strict
responsibility misrepresentations were intended to sound in tort, it could benefit from the
But as mentioned at the outset, there is a fundamental flaw in that
characterization: if CUNA Mutual’s claims sound in tort like the HIPA and negligence
claims in Stuart, they would then be barred by Wisconsin’s economic loss doctrine.10 In
Wisconsin, the economic loss doctrine “operates generally to preclude contracting parties
from pursuing tort recovery for purely economic or commercial losses associated with the
contract relationship.” Tietsworth v. Harley-Davidson, Inc., 2004 WI 32, ¶ 23, 270 Wis. 2d
146, 677 N.W.2d 233. Specifically, “Wisconsin courts have recognized that the economic
loss doctrine bars misrepresentation claims based in negligence and strict responsibility.”
Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶ 30, 283 Wis. 2d 555, 699 N.W.2d
205 (internal citations omitted); see also Ralph C. Zinaor, The Fraud in the Inducement
Exception to the Economic Loss Doctrine, 90 Marq. L. Rev. 921 (2007); R. Joseph Barton,
Drowning in a Sea of Contract:
Application of the Economic Loss Rule to Fraud and Negligent
Misrepresentation Claims, 41 Wm. & Mary L. Rev. 1789 (2000). Stated more plainly, CUNA
Mutual may not bring an action that sounds in contract for the purposes of evading the
Assuming CUNA Mutual wished to pursue this theory, it would also need to seek damages, rather
than contractual rescission, since it does not appear that avoidance of contract is an available remedy
in a tort action. See Notte, 97 Wis. 2d at 213 (“[A]voidance is primarily dealt with in the contract
action, while an affirmative claim for liability may lie for misrepresentation under the law of torts.”).
Given the impact of Wisconsin’s economic loss doctrine, this is something that CUNA Mutual has
obviously scrupulously avoided.
economic loss doctrine, but sounds in tort for the purposes of availing itself of the discovery
The Wisconsin Supreme Court’s discussion in Van Lare v. Vogt, Inc., 2004 WI 110,
274 Wis. 2d 631, 683 N.W.2d 46, further supports this conclusion.
In Van Lare, the
plaintiff filed a complaint asserting three causes of action: intentional misrepresentation,
negligent misrepresentation and strict responsibility representation. Although at the core of
the action was a claim for breach of contract,12 Van Lare did not bring any contractual
claims because they were barred by the six-year contract statute of limitations in § 893.43.
Id. at ¶ 11.
At the conclusion of the trial, Van Lare opted to pursue only his strict
responsibility claim before the jury, which returned a verdict in his favor.
Id. at ¶ 13.
Following that verdict, the trial court granted judgment notwithstanding the verdict on the
grounds that the economic loss doctrine barred Van Lare from recovering economic
damages on a strict responsibility misrepresentation claim. Id. at ¶ 14.
The Wisconsin Supreme Court affirmed that decision, noting first that Van Lare had
been “forced to base his claim on a misrepresentation theory rather than a breach of
contract theory because the period of limitation on the contract claim had run,” and then
rejecting Van Lare’s argument that the economic loss doctrine applied only to breaches of
CUNA Mutual does note that § 893.93(b) appears neither in the Contracts Subchapter nor the
Torts Subchapter of the Wisconsin statutes, but instead in Section 893.93, which is labeled
“Miscellaneous Actions.” In light of Wisconsin case law, however, the court declines to read CUNA
Mutual’s cause of action, at least as currently pled, as some sort of hybrid or “miscellaneous” claim -capable of evading both the bars of the economic loss doctrine as a tort claim and the statute of
limitations as a contract claim -- absent some authority suggesting that such a maneuver is
permissible outside the context of a claim of intentional misrepresentation.
Vogt conveyed real property to Van Lare by contract, representing that Vogt had no knowledge of
any defects affecting the property, including “the presence of any dangerous toxic materials or
conditions affecting the property.” 2004 WI 110, at ¶ 4. Van Lare later discovered that
construction debris had been buried on the site. Id. at ¶ 8.
tort duties and not to breaches of contract duties. Id. at ¶ 22. Instead, the court held that
the economic loss doctrine bars all misrepresentation claims “in the absence of a recognized
exception.” Id. at ¶ 28. The court also noted that the economic loss doctrine would not
have precluded claims for breach of contract, a violation of Wis. Stat. § 100.18, or
intentional misrepresentation. Id. at ¶ 23. But the statute of limitations had run on the
first two possibilities, and Van Lare himself dropped the intentional misrepresentation
claim. Id. The court concluded: “We cannot overrule our precedent to allow Van Lare’s
tort claim simply because his own action or inaction has barred other claims.” Id.
The similarity of the pleading history here to Van Lare is striking. CUNA Mutual
alleges claims for rescission based on negligent and strict responsibility misrepresentations
that are barred -- by the contract statute of limitations, if they sound in contract; and by the
economic loss doctrine, if they sound in tort. Accordingly, the court must dismiss those
II. Rescission on the Grounds of Mistake
UBS also argues that CUNA Mutual’s claims for rescission on the grounds of mistake
are barred by the statute of limitations, again pointing to the contract statute of limitations,
CUNA Mutual offers no argument as to why claims for rescission based on
mistake are not also time-barred. Indeed, CUNA Mutual does not appear to address the
statute of limitations applicable to these specific claims at all; its statute of limitations
argument is focused entirely on misrepresentation. (See Pl.’s Br. Opp’n (dkt. #31) 20-23.)
The only option remaining to CUNA Mutual is to move to amend its pleadings to bring a claim for
rescission on the grounds of fraudulent (intentional) misrepresentation, since Koehler, at least,
supports the application of § 893.93(b) in such instances. However, doing so would require CUNA
Mutual to plead fraud with particularity. Fed. R. Civ. P. 9(b).
The court has already rejected those arguments, and CUNA Mutual offers no other reason
why that ruling does not apply with equal force to claims that depend on proof of mistake,
not misrepresentation. Accordingly, the court concludes that this claim is, like the other
rescission claims, barred by § 893.43 and will grant UBS’ motion to dismiss.
III. Unjust Enrichment
Finally, UBS argues that the claim for unjust enrichment is time-barred by § 893.43.
As UBS points out, unjust enrichment is a claim based on quasi-contract. Boldt v. State, 101
Wis. 2d 566, 578, 305 N.W.2d 133 (1981). Such claims are also subject to the six-year
statute of limitations for contract claims. Id.; see also Stapel v. Stapel, No. 2009AP1195,
2010 WI App 120, 329 Wis. 2d 269, 789 N.W.2d 753 (per curiam) (“Recovery based on
unjust enrichment is sometimes referred to as a quasi-contract. As a claim based on quasicontract, a claim for unjust enrichment is subject to the six-year statute of limitations set
forth in Wis. Stat. § 893.43.”). Since CUNA Mutual also fails to respond to this argument
in its brief in opposition, the court likewise deems this claim time-barred. Wojtas v. Capital
Guardian Trust Co., 477 F.3d 924, 926 (7th Cir. 2007) (failure to oppose the statute of
limitations argument constitutes a waiver). Accordingly, the court grants UBS’ motion to
dismiss this claim as well.
IT IS ORDERED that:
1) Defendant’s Motion to Dismiss (dkt. #20) is GRANTED.
2) Defendant’s Motion to Stay Discovery (dkt. #24) is DENIED as moot.
Entered this 1st day of July, 2014.
BY THE COURT:
WILLIAM M. CONLEY
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