John Schlueter v. Edward Latek , 683 F.3d 350 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-3679
JOHN S CHLUETER,
Plaintiff-Appellant,
v.
E DWARD C. L ATEK and L ATEK C APITAL C ORP.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 2:11-cv-00127-LA—Lynn S. Adelman, Judge.
A RGUED A PRIL 10, 2012—D ECIDED JUNE 6, 2012
Before P OSNER, R OVNER, and H AMILTON, Circuit Judges.
P OSNER, Circuit Judge. This appeal in a diversity suit
presents issues of Wisconsin law, both statutory law and
common law. The plaintiff seeks recovery, on a theory
of restitution, of a brokerage fee that he paid the defen-
dants. The district court, deeming the parties in pari
delicto (equally at fault), granted the defendants’ motion
to dismiss the complaint for failure to state a claim. The
defendants are a corporation engaged in providing in-
2 No. 11-3679
vestment banking services to the equipment rental in-
dustry, and the corporation’s principal. See www.
latekcapital.com/services.html (visited May 22, 2012).
We’ll simplify our opinion by pretending that the
only defendant is the corporation, which we’ll call Latek;
but at the end of the opinion we’ll discuss briefly the
plaintiff’s joinder of Mr. Latek as an additional defendant.
The plaintiff, John Schlueter, was the owner of a corpora-
tion named Karl’s Rental Center. He retained Latek to
help him obtain either an equity investor in, or a buyer of,
Karl’s. On the advice of Latek, Schlueter entered into
negotiations with a company called Horizon Partners
that culminated in a sale of a majority of the plaintiff’s
stock in Karl’s for some $30 million.
Latek billed the plaintiff $758,675 for its services in
negotiating the deal. The plaintiff paid the fee without
complaint or reservations but later brought this suit for
the return of the entire fee on the ground that Latek
had not had a brokerage license. Chapter 452 of the
Wisconsin Statutes, entitled “Real Estate Practice,” requires
that one have a license to “negotiate a sale” of “an interest
or estate in real estate, a time share, or a business or its
goodwill, inventory, or fixtures, whether or not the busi-
ness includes real property.” Wis. Stats. §§ 452.01(2)(a),
452.03. Latek doesn’t have a broker’s license, or at least
didn’t when negotiating the deal with Horizon.
Besides defending the district court’s ground of dis-
missal (the in pari delicto doctrine), Latek argues that under
Wisconsin law, as under federal securities law, see
Landreth Timber Co. v. Landreth, 471 U.S. 681, 689-91 (1985);
No. 11-3679 3
SEC v. National Presto Industries, Inc., 486 F.3d 305, 309-10
(7th Cir. 2007), the sale of stock in a business is not the
sale of a business, and so Latek was not required to have
a license to negotiate the sale of a majority stake in Karl’s.
The only judicial decisions that we’ve found that bear
on the issue are two federal district court decisions, only
one recent. They agree with Latek. Bertha v. Remy Int’l, Inc.,
414 F. Supp. 2d 869, 877-81 (E.D. Wis. 2006); Schaller v.
Litton Industries, Inc., 307 F. Supp. 126, 133-35 (E.D. Wis.
1969). The opinions are well reasoned, but being fed-
eral trial court opinions they are not authoritative
construals of the Wisconsin statute. Even a federal
court of appeals opinion would not be authoritative on
a question of state law.
The statute was amended after the Bertha decision,
moreover, and it is the amended statute that applies to
this case. The provision on which the court focused in
Bertha, see 414 F. Supp. 2d at 874, 877, was not section
452.01(2)(a), quoted above, but section 452.01(2)(d),
which defines (or, rather, defined) “broker” as someone
who “negotiate[s] a sale . . . of any business, its goodwill,
inventory, fixtures or an interest therein.” That section
has been deleted, while section 452.01(2)(a), which
further defined a broker to include one who “negotiate[s]
a sale . . . of an interest or estate in real estate,” now reads,
as we know, “negotiate[s] a sale . . . of . . . an interest or
estate in real estate, a time share, or a business or its good-
will, inventory, or fixtures, whether or not the business
includes real property.” The words we’ve italicized are
the key to the plaintiff’s argument; one who owns stock
in a corporation, he argues, owns “an interest” in a busi-
4 No. 11-3679
ness and therefore anyone who negotiates a sale of
stock requires a license.
This can’t be right, because it would require every
securities broker in Wisconsin to have a real estate
broker’s license as well as a securities license, which
securities brokers are already required to have. Wis. Stat.
§ 551.401(1). We don’t know whether Latek has a
securities license, and it doesn’t matter; the plaintiff
doesn’t argue that it matters and probably Latek is
exempt from having to have one because it was
brokering a deal involving the issuer of the securities
that were sold (Karl’s Rental Center), and such brokering
is exempt. Wis. Stat. § 551.401(2)(a).
The statutory changes to which the plaintiff points do
not undermine the analysis in the Bertha opinion. The
question whether ownership of stock is ownership of an
interest in a business was the precise question that
the court addressed in Bertha (as well as in the earlier
district court opinion that we cited) and the amend-
ments on which the plaintiff relies merely shifted the
language interpreted in Bertha (“interest . . . in . . . a
business”) from subsection 2(d), which was repealed, to
subsection 2(a), which was enlarged.
A considerable complication, however, is that Latek
was hired to sell either the business or the plain-
tiff’s stock in it. Had he done the former, as he initially
tried to do, clearly he would have needed a license.
He didn’t consummate a sale of the business,
but a failed negotiation is still a negotiation; the stat-
ute defines “negotiate” broadly, to mean “to provide to
No. 11-3679 5
a party assistance within the scope of the know-
ledge, skills, and training required under this chapter in
developing a proposal or agreement relating to a trans-
action, including . . . participating in communications
between parties related to the parties’ interests in a trans-
action.” Wis. Stat. § 452.01(5m)(a). Latek negotiated on
Schlueter’s behalf the letter of intent to sell the assets
of his business, and this was “negotiating” for the sale
of the business, albeit that sale fell through in favor of
a sale of stock.
Is a license required for a failed attempt? Who knows?
There’s enough uncertainty about the proper interpreta-
tion of the amended statute that were it essential for
our deciding this case correctly to choose between the
rival interpretations, we would be inclined to certify
the question to the Supreme Court of Wisconsin for an
authoritative answer. But it is not essential. For there
is another potentially dispositive issue, concerning the
relief sought by the plaintiff for the alleged violation of
the brokerage statute.
Although there is no indication that Latek was
aware that it might be violating a statute in negotiating
the sale of the plaintiff’s stock in Karl’s Rental Center,
and no complaint about the quality of the service it ren-
dered or the reasonableness of its fee, the plaintiff ar-
gues that he’s entitled to restitution of the fee as punish-
ment for Latek’s violation, if there was a violation as
we are now assuming for the sake of argument. The
assumption is the premise of an alternative ground for
affirmance—that the plaintiff is not entitled to the relief
he is seeking even if there was a violation.
6 No. 11-3679
The fact that he was helped rather than hurt by the
alleged violation and so is not entitled to damages is
not dispositive. Restitution and damages are different
remedies. Damages are measured by the plaintiff’s loss,
restitution by the defendant’s gain. Management Computer
Services, Inc. v. Hawkins, Ash, Baptie & Co., 557 N.W.2d 67,
79-80 (Wis. 1996); Ryerson Inc. v. Federal Ins. Co., No. 10-
3522, 2012 WL 1216282, at *2 (7th Cir. Apr. 12, 2012); 1 Dan
B. Dobbs, Law of Remedies § 4.1(1), p. 555 (2d ed. 1993).
Often they’re equivalent, as when the plaintiff had over-
paid the defendant by mistake and seeks to recover
the overpayment. But not always. A defendant who
takes something (and not because of an innocent
mistake, either) that belongs to the plaintiff must give
it back together with any profit from the unlawful ap-
propriation even if that profit exceeded what the
plaintiff would have earned had his property not been
taken. City of Milwaukee v. Knox, 266 N.W. 911, 914
(Wis. 1936); Warren v. Century Bankcorporation, Inc., 741
P.2d 846, 851-52 (Okla. 1987); Restatement (Third) of Resti-
tution & Unjust Enrichment §§ 51(4), (5)(a), and comment f;
and § 53 (2011); 1 Dobbs, supra, § 4.1(1), p. 554; Douglas
Laycock, “The Scope and Significance of Restitution,”
67 Tex. L. Rev. 1277, 1288-89 (1989). If someone steals
your pregnant cow, you are entitled to get the cow back
but also the calf even if the thief incurred expenses
in assisting the birth of the calf and his assistance was
essential to its survival.
Speaking of thieves, “suppose a thief takes the plaintiff’s
$10 watch and sells it for $20. The thief is liable for $20,
as ‘restitution.’ One possible justification for this result
No. 11-3679 7
is that we think the thief’s sale price is good evidence of
the actual value of the watch, in which case $20 would
represent damages for the plaintiff’s loss. But even if the
plaintiff concedes that the watch was only worth $10,
he can recover the $20 as restitution . . . . The defendant
is liable for the $20 because the . . . $20 is perceived as
[including] a gain [$20 – $10] produced by the plaintiff’s
property. By identifying the $20 as a product of the plain-
tiff’s property, we can think of it as a replacement or
substitute for the property.” 1 Dobbs, supra, § 4.1(1), p. 554
(emphasis in original). There isn’t anything like that in
this case. Latek didn’t take something that belonged to
the plaintiff. It merely rendered a service and the
plaintiff paid without complaint the fee for which he
was billed pursuant to their service contract.
If anyone would be entitled to restitution, it would be
Latek if the contract were unenforceable because of the
absence of a license; for Latek could then argue for being
able to sue for quantum meruit (“what he deserves”), that
is, to sue for the value of the service rendered (provided
it was less than the agreed-upon fee), which is a form
of restitution because designed to prevent unjust enrich-
ment. See, e.g, Scheiber v. Dolby Laboratories, Inc., 293 F.3d
1014, 1022-23 (7th Cir. 2002). Often quantum meruit
is awarded even in cases in which the contract is unen-
forceable because illegal. De La Vergne Refrigerating
Machine Co. v. German Savings Institution, 175 U.S. 40, 58
(1899); Scheiber v. Dolby Laboratories, Inc., supra, 293 F.3d at
1022-23; United States v. Amdahl Corp., 786 F.2d 387, 393
(Fed. Cir. 1986); Zbichorski v. Thomas, 103 N.W.2d 536,
537 (Wis. 1960).
8 No. 11-3679
But this may not be a good argument in a case
governed by Wisconsin law; for a Wisconsin case which
holds that a broker can’t recover in quantum meruit for the
value of his performance of a contract that fails to
comply with the statute of frauds states that “there can
be no recovery in the nature of commissions by real
estate brokers or others upon quantum meruit for
services rendered in buying or selling real estate.” Hale
v. Kreisel, 215 N.W. 227, 228 (Wis. 1927). The case is old,
and deals with a sale of real estate rather than a sale of
stock or of a business, but its language is broad and it
has never been overruled. Another old case, also never
overruled, Hickey v. Sutton, 210 N.W. 704, 704 (Wis. 1926),
holds regarding an unlicensed architect that “the failure
to procure a license bars recovery where the license is
exacted as a police measure for the protection of the
public,” and adds that this rule “applies with equal force
whether the requirement is sought upon contract or upon
quantum meruit.” An unlicensed architect sounds a
good deal more dangerous than an unlicensed real
estate broker, but if requiring a broker to be licensed is
intended for the protection of the public—albeit not
from the fall of a poorly designed building—rather than
just for protecting brokers from competition, maybe
Hickey bears on our case.
In response Latek needlessly complicates matters by
arguing that the relief sought by the plaintiff—the return
of his fee—is barred because he is in pari delicto with Latek.
The plaintiff responds that he cannot be in pari delicto
because he has committed no “delict”; the statute does
No. 11-3679 9
not forbid the hiring of an unlicensed broker, but only
the broker’s failure to have obtained a license.
The common law teaches that if the opposing
parties in a lawsuit are equally in the wrong and as a
result neither has a colorable claim against the
other—more precisely, if awarding relief to the plaintiff
would reward wrongdoing—courts will not adjudicate
their dispute. The classic illustration is Everet v. Williams
(Ex. 1725), better known as The Highwayman’s Case and
reported (long afterward) in a note by that name in 9 L.Q.
Rev. 197 (1893). A highwayman sued his partner in
crime for an accounting of the illegal profits of their
criminal activity. The court refused to adjudicate the
case, and both parties were hanged. A modern example
would be a suit by the owner of a misleading trademark
for infringement of the mark. The suit would be
dismissed, although the parties would not be hanged.
Both examples and another are discussed in Shondel v.
McDermott, 775 F.2d 859, 868 (7th Cir. 1985).
When as in such cases the plaintiff is asking for
equitable relief, the in pari delicto defense is referred to as
the unclean-hands defense. But the label doesn’t matter,
and the defenses were equated in McKennon v. Nashville
Banner Publishing Co., 513 U.S. 352, 360-61 (1995); see
also Byron v. Clay, 867 F.2d 1049, 1052 (7th Cir. 1989);
Scheiber v. Dolby Laboratories, Inc., supra, 293 F.3d at 1022.
The point is only that a court will not adjudicate a case if
a judgment for the plaintiff would encourage or reward
criminal or other unlawful activity—and by the same
token it will not enforce a defense of in pari delicto if the
10 No. 11-3679
effect would be to encourage or reward a greater wrong.
The second ground is the one on which the defense was
rejected in Bateman Eichler, Hill Richards, Inc. v. Berner, 472
U.S. 299, 312-14 (1985), and Perma Life Mufflers, Inc. v.
International Parts Corp., 392 U.S. 134, 137-39 (1968) (plural-
ity), the latter a case in which the plaintiff challenged, as
a violation of antitrust law, restrictions on its competitive
freedom, to which it had agreed in contracts with
the defendant. The defendant pleaded in pari delicto as
a defense to the plaintiff’s suit for damages. The Court
rejected the defense, holding that antitrust law, which
would be disserved by enforcing the contracts, trumps
contract law.
The law could easily do without an unclean-hands
doctrine and an in pari delicto doctrine, since they reduce
to the principle that a court will not entertain a claim
or defense that would create a greater legal wrong
than vindicating the claim or defense would avert. The
principle cannot help Latek. The plaintiff can hardly be
thought to have been equally at fault with Latek, if
Latek violated (as we’re assuming, though only for the
sake of argument) the brokerage statute, while the plain-
tiff, so far as anyone is suggesting, violated nothing
by contracting with Latek. The statute did not require
the plaintiff—the broker’s client—to get a license, or
forbid it to deal with an unlicensed broker. And it’s not
as if by contracting with Latek the plaintiff harmed some-
one else. To punish the plaintiff would be the equivalent
of deeming the victim of a theft an accomplice of the
thief on the theory that without a victim there would
have been no theft, and thus of barring the victim from
No. 11-3679 11
suing to recover what had been stolen from him. Cf.
Badger Coal & Coke Co. v. Sterling Midland Coal Co., 192 N.W.
461-62 (Wis. 1923).
But to bar relief for this plaintiff can hardly be thought
a punishment for a victim of a violation. The plaintiff
alleges no harm from the violation. He is seeking com-
pensation for having spotted a violation of the statute
and incurred legal expenses to punish the violator—a
bounty-hunter or “private attorney general” theory of
liability. There is no common law principle that
someone who discovers a violation of law that caused
him no harm can nevertheless sue the violator for the
latter’s profit from the violation. There are plenty of
bounty-hunter statutes, see, e.g., 25 U.S.C. § 201 (violation
of Indian protection laws); 31 U.S.C. § 3730(d) (False
Claims Act); 47 U.S.C. § 80103 (removing wrecked
property from Florida coast to foreign nations), and
plenty of statutes that provide bounty-like relief in the
form of statutory damages to which a plaintiff is entitled
without proof of injury. See, e.g., 15 U.S.C. § 1640(a)(2)(A)
(Truth in Lending Act); 15 U.S.C. § 1681n(a)(1)(A), (3)
(Fair and Accurate Credit Transactions Act); 17 U.S.C.
§ 504(c) (copyright infringement); 18 U.S.C. § 2710(c)(2)(A)
(wrongful disclosure of video tape rental or sale re-
cords); 29 U.S.C. § 1854(c)(1) (Migrant and Seasonal
Agricultural Worker Protection Act); 47 U.S.C. § 227(b)(3)
(Telephone Consumer Protection Act) (unsolicited text
messages or fax advertisements). But no Wisconsin
statute authorizes the bounty that the plaintiff is seeking.
So his only hope is to show that the brokerage statute
creates an implied right to seek such a bounty. Under
12 No. 11-3679
Wisconsin law as under federal law, implied rights of
action to enforce statutes that do not specify a monetary
remedy are occasionally recognized. Green v. Jones, 128
N.W.2d 1, 5 (Wis. 1964). But again as in federal law, e.g.,
Mallett v. Wisconsin Division of Vocational Rehabilitation,
130 F.3d 1245, 1249 (7th Cir. 1997), the presumption is
against them. See McNeill v. Jacobson, 198 N.W.2d 611,
614 (Wis. 1972); Miller Aviation v. Milwaukee County
Board of Supervisors, 273 F.3d 722, 728-29 (7th Cir. 2001)
(Wisconsin law). We’ve never heard of an implied right
to restitution of a violator’s profit that was not a conse-
quence of an injury of some sort to the plaintiff. If a
state creates a right of action, restitution—the conditions
for which, we emphasize, are not satisfied in this case—is
a permissible remedy. But what the plaintiff is seeking
in this case is not restitution.
All other objections to one side, so novel an implied
right of action as the plaintiff asserts cannot be defended
as necessary to promote compliance with the brokerage
statute. The “Real Estate Practice” act, as it is still called
despite its having been broadened beyond real estate,
provides misdemeanor criminal remedies for violating
the statute, § 452.17, and, more important, forbids a
violator to sue (perhaps including for quantum meruit) to
collect any compensation for his brokerage services.
§ 452.20. So had the plaintiff not paid Latek’s fee, Latek
could not have sued him for it (always assuming that
the statute was violated). The fact that an unlicensed
broker cannot sue for his fee is a significant deterrent to
violating the brokerage law, and combined with the
criminal sanctions should provide adequate deterrence,
No. 11-3679 13
without need to add the sanction that the plaintiff advo-
cates. In a case decided after the oral argument in
the present appeal, Wisconsin’s intermediate appellate
court held, consistent with this point, that “the only
consequences for violating Wis. Stat. § 452.03 by acting
as a real-estate broker in Wisconsin without a license are:
(1) the violator may not sue in a Wisconsin court for a
brokerage commission; and (2) the violator may be
subject to criminal penalties . . . . Protection of Wisconsin
residents from unlicensed real-estate brokers is, as the
legislature determined, sufficiently enforced by denying
those brokers the right to sue for their commissions
in Wisconsin courts and by subjecting them to potential
criminal penalties.” Hernandez v. BNG Management
Limited Partnership, No. 2011AP362, 2012 WL 1499826(Wis. App. May 1, 2012).
For the sake of completeness, we address Latek’s ar-
gument that the suit fails for still another reason: the
“voluntary payment” doctrine, recognized in Wisconsin
as in other states. If you pay a bill voluntarily—that is,
on demand, rather than after being sued or threatened
with suit—you can’t later sue to recover what you paid,
on the basis of facts known to you (or that you should
have known) when you paid. Putnam v. Time Warner Cable,
649 N.W.2d 626, 631-37 (Wis. 2002); Butcher v. Ameritech
Corp., 727 N.W.2d 546, 552-56 (Wis. App. 2006); Anthony
v. American General Financial Services, Inc., 697 S.E.2d
166, 175 (Ga. 2010); Huch v. Charter Communications, Inc.,
290 S.W.3d 721, 726 (Mo. 2009); King v. First Capital Finan-
cial Services Corp., 828 N.E.2d 1155, 1171 (Ill. 2005). The
reason is to reduce uncertainty in commercial transac-
14 No. 11-3679
tions; the recipient of the voluntary payment doesn’t
have to create a reserve against the possibility of having
to return the payment. The plaintiff argues that he
didn’t know that Latek had no license. If instead he
were arguing that he didn’t know that Latek needed to
have a license, that would be a mistake of law; and
mistake of law is not a defense to the voluntary-
payment rule, Putnam v. Time Warner Cable, supra, 649
N.W.2d at 632; Butcher v. Ameritech Corp., supra, 727 N.W.2d
at 555; Stone v. Mellon Mortgage Co., 771 So.2d 451, 458
(Ala. 2000), because the law is equally accessible to
both parties to the transaction. A mistake of fact is dif-
ferent; its absence is a precondition to the application of
the doctrine, as the statements of the doctrine in the
cases we’ve cited make clear.
So the voluntary-payment doctrine is inapplicable,
and the in pari delicto doctrine unhelpful, but nevertheless
Latek wins.
It remains to say just a word about the joinder of Mr.
Latek as a defendant. He should not have been joined, for
when, as in this case, “an agent merely contracts on
behalf of a disclosed principal, the agent does not be-
come personally liable to the other contracting party.”
Benjamin Plumbing, Inc. v. Barnes, 470 N.W.2d 888, 893
(Wis. 1991).
The judgment of dismissal is
A FFIRMED.
6-6-12