Opinion ID: 598994
Heading Depth: 2
Heading Rank: 1

Heading: Fraud Under the WFIL

Text: 10 Under the express terms of the Commissioner's order, the Offering Circular was to be prepared in the form required by SEC 32.02, Wis.Adm.Code or disclosure document prepared in the form required by 16 CFR 436. Section 32.02 provides that the Offering Circular should be prepared in accordance with guidelines promulgated by the North American Securities Administrators Association (NASAA Guidelines). Both the NASAA Guidelines and 16 CFR § 436.1 generally prohibit unfair and deceptive practices in connection with the Offering Circular. 11 The provision of the WFIL dealing with fraudulent practices states in part: 12 (1) No person may make or cause to be made, in any document filed with the commissioner or in any proceeding under this chapter, any statement which is, at the time and in the light of the circumstances under which it is made, false or misleading in any material respect or, in connection with any statement required to be made under s. 553.31(1), omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which they are made, not misleading. 13 (2) No person may violate any order of the commissioner or condition therein of which the person has notice. 14 (3) No person may offer, purchase or sell a franchise in this state by means of any written or oral communication not included in sub. (1) which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.... 15 Wis.Stat.Ann. § 553.41(1), (2), (3). 16 The Sampsons argue that Embassy violated subsections 1 and 3 by making false or misleading statements or omissions in the Offering Circular relating to Embassy's willingness to allow self-management of its hotel franchises. Under the Sampsons' theory, these alleged misstatements and omissions in turn violate subsection 2's prohibition against violating an order of the Commissioner, because the Commissioner required that Embassy prepare the Offering Circular in accordance with the NASAA guidelines and the regulations found at 16 CFR § 436.1, both of which contain anti-fraud provisions. 17 In order to prevail under any of these provisions, the Sampsons need to demonstrate that Embassy made false or misleading statements or omissions in the Offering Circular--this is a common element to all three theories which the Sampsons advance. The district court efficiently disposed of the Sampsons' claims under all three provisions by concluding that Embassy made no false or misleading statements or omissions in the Offering Circular. This conclusion eliminated any claim for misstatements or omissions under subsections 1 and 3, and further eliminated the claim under subsection 2 that Embassy violated the Commissioner's order by committing fraud. We review the district court's conclusion that Embassy did not violate the anti-fraud provisions of the WFIL under a de novo standard. See Diesel Service Co. v. AMBAC Int'l Corp., 961 F.2d 635, 636 (7th Cir.1992).
18 The Sampsons allege that statements made in sections 8 and 15 of the Offering Circular effectively represent that Embassy would permit franchisees to self-manage the hotels. 3 Section 8, however, deals with the degree to which a franchisee may be required to purchase services from the franchisor. Nothing in section 8 addresses the issue of management, and we cannot imagine how section 8 could be read as a statement related to self-management. Section 15 of the Offering Circular requires a franchisee to participate in the actual operation of the hotel. Under this provision, the franchisee is not required to participate in the direct operation of the hotel and its business, but may hire a general manager of his own choice and generally must exercise some degree of management control over the hotel. Because the provisions in Section 15 refer to the management of the hotel, although not in the specific way portrayed by the Sampsons, 4 we will consider whether they are false or misleading. 19 The Sampsons argue that Embassy's later disclosed preference for corporate management necessarily renders the statements in Section 15 to be false or misleading. But even if the representations in the Offering Circular are read in the way the Sampsons desire--as definitively stating that Embassy allows self-management of the hotels--the statements are not rendered false or misleading by Embassy's later disclosed preference for corporate management. Just because Embassy may have preferred corporate management does not make Section 15's stated allowance of self-management false or misleading. Embassy could well have preferred the one, but nevertheless allowed the other. 20 The clear wording of Section 15 conveys an obligation on the part of the franchisee to participate in the management of the hotel. There is no evidence that Embassy's preference for corporate management foreclosed any participation in management by the Sampsons. In fact, Embassy sought to enter into a management agreement in which the Sampsons could have negotiated the degree of their participation in the management of the hotel. Because the parties never completed the management agreement, it is unclear whether Embassy would have prohibited the Sampsons from participating in management. 21 Even assuming that Embassy had entered into a management agreement which totally precluded the Sampsons from any participation in management, this would not render the statements of Section 15 to be false or misleading. Section 15 imposes a future obligation upon a franchisee to participate in the management of the hotel. Nothing would prevent Embassy from voluntarily waiving this obligation, and negotiating the right to exclusively manage the hotel. The announcement of an obligation relates to a future event which does not become fraudulent if the obligation is subsequently waived. Cf. Federal Deposit Ins. Corp. v. Lauterbach, 626 F.2d 1327, 1334 (7th Cir.1980) (false representation must relate to present or preexisting events or facts and may not be mere prediction of future events).
22 Having concluded that no false or misleading statements were made in the Offering Circular, we next turn to whether Embassy violated the anti-fraud provisions of the WFIL by omit(ing) to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Wis.Stat.Ann. § 553.41(1) and (3). The Sampsons contend that Embassy's failure to disclose its preference for corporate management in the Offering Circular was such an omission. 23 However, the stated purpose of the Offering Circular was to provide a SUMMARY ONLY OF CERTAIN MATERIAL PROVISIONS OF THE FRANCHISE AGREEMENT. The Offering Circular did not purport to speak on the criteria Embassy would use in choosing between competing applications; it was silent on this issue. Nothing in the Offering Circular can be read as giving the impression that Embassy would more highly regard an application which allowed self-management. If Embassy had somehow given that impression, then it might have had an affirmative duty to clarify its position by including the statement that when judging competing applications, it prefers the one which allows for corporate management. Cf. In re Estate of Lecic, 104 Wis.2d 592, 312 N.W.2d 773, 779 (1981) (a failure to disclose a fact constitutes misrepresentation only when the nondisclosing party has a duty to disclose the fact; the question of legal duty to disclose is a question of law). Because the Offering Circular did not even purport to speak on Embassy's criteria for judging competing applications, Embassy possessed no duty to include a statement in the Offering Circular clarifying its position in this regard. 5
24 Under the WFIL,  '(f)raud' and 'deceit' are not limited to common law fraud or deceit. Wis.Stat.Ann. § 553.03(8). Therefore, the element of detrimental reliance usually essential in a common law fraud case is not necessarily required under section 553.41. However, the enforcement provisions of the WFIL essentially write the element of detrimental reliance into the statute. Sections 553.51(1) and (2) preclude liability for violation of sections 553.41(1), (2) and (3), if the defendant proves that the plaintiff knew the facts concerning the untruth or omission. 25 Here, the Sampsons claim to have known of Embassy's alleged failure to disclose its preference for corporate management at least when the Sampsons effectively amended their application to allow for corporate management. At that time, the Sampsons could have withdrawn their application and would have then been entitled to a refund of the $50,000 fee which they had already paid. See supra n. 1. Instead, the Sampsons continued without apparent hesitation to pursue a franchise. From this action it is clear that the Sampsons did not rely upon the alleged false or misleading statements or omissions when applying for the franchise. Cf. Collins v. Eli Lilly Co., 116 Wis.2d 166, 342 N.W.2d 37, 54 (1984) (there can be no recovery for fraud when there was no reliance on the misrepresentation).