Taizhou Yuanda Investment Grou v. Z Outdoor Living, LLC ( 2022 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 21-1839
TAIZHOU YUANDA INVESTMENT GROUP CO., LTD., and
TAIZHOU YUANDA FURNITURE CO., LTD.,
Plaintiffs-Appellants,
v.
Z OUTDOOR LIVING, LLC, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Western District of Wisconsin.
No. 3:19-cv-875 — James D. Peterson, Chief Judge.
____________________
ARGUED JANUARY 11, 2022 — DECIDED AUGUST 10, 2022
____________________
Before EASTERBROOK, SCUDDER, and KIRSCH, Circuit Judges.
KIRSCH, Circuit Judge. Chinese manufacturer Taizhou Yu-
anda sued its Wisconsin-based vendors, Z Outdoor Living
and AFG, and owners and officers of both companies, after
the companies failed to pay Taizhou money owed under a fur-
niture production deal. Taizhou sued for breach of contract
and under tort theories of fraud and conversion, alleging eli-
gibility for recovery in tort on the basis that Taizhou only
2 No. 21-1839
continued to do business with the defendants because they
repeatedly misled Taizhou about when it could expect pay-
ment for prior orders. The parties resolved the breach of con-
tract claims, and the district court dismissed the plaintiffs’ tort
claims under Federal Rule of Civil Procedure 12(b)(6), con-
cluding they were barred by Wisconsin’s economic loss doc-
trine. Taizhou says we should reinstate those claims because
two exceptions to that doctrine apply. But we disagree and so
affirm.
I
We recite as true the well-pleaded facts raised in the com-
plaint. W. Bend Mut. Ins. Co. v. Schumacher, 844 F.3d 670, 675
(7th Cir. 2016).
In January 2017, Taizhou Yuanda Furniture Co., Ltd. (a
Chinese manufacturer and subsidiary of Taizhou Yuanda In-
vestment Group Co., Ltd., collectively “Taizhou”) entered
into a Cooperation Agreement with Z Outdoor Living, LLC (a
Wisconsin company wholly owned by Casual Products of
America, LLC). Under the Cooperation Agreement, Taizhou
would manufacture outdoor furniture and other related items
for Z Outdoor to sell to customers.
The Cooperation Agreement provided that customers
would order Taizhou-manufactured furniture through Z Out-
door, which would then send purchase orders to Taizhou for
fulfillment. Once those orders were fulfilled, Z Outdoor was
to pay Taizhou for all outstanding invoices within 10 days of
receiving payment from the customer. The agreement also
stated that Z Outdoor would clarify all payment terms in the
purchase orders and would pay Taizhou on the price detailed
in the outstanding invoice.
No. 21-1839 3
Z Outdoor eventually stopped paying Taizhou for all the
purchase orders Taizhou had fulfilled. Don and Erin Corning,
on behalf of Z Outdoor, made a series of false statements be-
tween August 2, 2018 and February 20, 2019 about future busi-
ness, forthcoming payment, and other causes for the delays.
According to Taizhou, these false statements convinced the
company to “continue to … procure materials, manufacture
the furniture, and fill customer orders even without receiving
compensation for their goods.”
In October 2018, AFG (a Wisconsin LLC also wholly
owned by Casual Products of America, LLC) started submit-
ting purchase orders to Taizhou. AFG never signed the Coop-
eration Agreement but told Taizhou that AFG would begin to
submit orders in order to increase their business with a na-
tional chain of home improvement stores. According to the
complaint, “[l]ike Z Outdoor, AFG obtained purchase orders
from customers and then submitted those purchase orders to
[Taizhou]. … [Taizhou] filled the orders and shipped the
products … [and] then sent AFG invoices for the products
that had been ordered[.]”
AFG also stopped paying Taizhou for the orders. Like Z
Outdoor, AFG reps, including AFG President Kendra Farley
and another owner of AFG, Pete Hill, made a series of false
statements between November 26, 2018 and August 14, 2019
regarding payment delays and when payment could be ex-
pected. In sum, the total due from Z Outdoor and AFG ac-
crued to $14 million for purchase orders sent between 2017
and 2019.
In October 2019, Taizhou sued both Z Outdoor and AFG,
their shared parent company Casual Products of America, in
addition to Don Corning, Erin Corning, Kendra Farley, and
4 No. 21-1839
Pete Hill, in federal court, alleging a number of claims against
each of the various defendants, including breach of contract
and unjust enrichment, and most relevant to this appeal,
fraud against all defendants except Casual Products of Amer-
ica and conversion against all defendants.
The defendants did not challenge the breach of contract
claims but contended that all of the other claims were redun-
dant of that claim or were not actionable. The district court
largely agreed, allowing the case to proceed on claims against
Z Outdoor and AFG for breach of contract and against Z Out-
door, AFG, and Casual Products of America for unjust enrich-
ment and dismissing all other claims against all other parties.
The court eventually entered default judgment against the
corporate defendants on the contract claims after the compa-
nies failed to defend those claims, but entered judgment
against Taizhou on the unjust enrichment, fraud, and conver-
sion claims. Relevant to this appeal, the court held that the
fraud and conversion claims against all the defendants were
barred by Wisconsin’s economic loss doctrine. In other words,
the district court dismissed the tort claims as mere repackag-
ing of Taizhou’s “straightforward breach of contract claim,”
which is precisely the type of claim that Wisconsin’s economic
loss doctrine seeks to prevent. Taizhou now appeals the dis-
trict court’s dismissal of its fraud and conversion claims, ar-
guing that two exceptions make the economic loss doctrine
inapplicable. (Taizhou has not asked us to decide whether the
individual defendants might be found responsible under a
veil-piercing approach in collection proceedings on the
breach of contract claims.)
No. 21-1839 5
II
Under Wisconsin law, which all parties agree applies in
this diversity suit, the economic loss doctrine bars recovery in
tort for economic losses sustained from a contractual dispute.
See Kaloti Enterprises, Inc. v. Kellogg Sales Co., 699 N.W.2d 205,
216 (Wis. 2005) (The doctrine “preclud[es] contracting parties
from pursuing tort recovery for purely economic or commer-
cial losses associated with the contract relationship.”) (citation
omitted). Taizhou claims two different exceptions to this doc-
trine under Wisconsin law apply to this case, either of which
would permit Taizhou’s recovery from the defendants in tort.
We review de novo the district court’s rejection of both excep-
tions under Rule 12(b)(6). W. Bend Mut. Ins. Co., 844 F.3d at
675.
A
In Wisconsin, the economic loss doctrine does not bar tort
recovery related to a fraudulently induced contract. See Kaloti,
699 N.W.2d at 219. Taizhou argues that the defendants’ false
statements induced Taizhou to fill new purchase orders in
2019. But to accept that this fraud triggers an exception to the
economic loss doctrine, we would have to find that the 2019
purchase orders were a new, separate contract (or contracts)
because “the fraud must be extraneous to [an existing] con-
tract, rather than interwoven with it, to be actionable as a
tort.” Schreiber Foods, Inc. v. Lei Wang, 651 F.3d 678, 682 (7th
Cir. 2011); Kaloti, 699 N.W.2d at 219. There is no basis on
which we could conclude that here.
On appeal, Taizhou frames the 2019 purchase orders as ex-
traneous to prior orders, presumably to suggest that these
new orders were separate contracts. But according to the
6 No. 21-1839
complaint, all purchase orders were submitted under the Co-
operation Agreement, acting merely as the nuts-and-bolts of
this dealer-supplier contractual relationship. The complaint
never suggested that any of the purchase orders were under
a separate contract (or were themselves separate, individual
contracts), and the arguments before the district court never
distinguished the 2019 orders as such either (in fact, the sam-
ple purchase orders Taizhou entered into the record are sim-
ple, standard order forms from one of the customers,
Menards, and contain no suggestion of an agreement between
Taizhou and the defendants). Rather, Taizhou alleged that the
defendants’ statements fraudulently induced Taizhou “to con-
tinue[] to obtain materials from suppliers, manufacture prod-
ucts, and deliver the products to customers” (emphasis
added), which characterizes the role of the 2019 purchase or-
ders as simply the means of carrying out the ongoing under-
lying agreement. In other words, Taizhou’s own characteriza-
tion of the fraud dooms this claim because it alleges the fraud
induced Taizhou to continue the contract, not enter a new one.
Furthermore, we have recognized that the critical distinc-
tion between fraud that is “interwoven with” a contract as op-
posed to “extraneous to” that contract is whether one would
expect for the matter over which the fraud occurred “to be
dealt with in the contract.” Schreiber Foods, 651 F.3d at 682(quoting Kaloti, 699 N.W.2d at 220). All the fraudulent state-
ments alleged were promises to pay orders made under the
Cooperation Agreement—that Taizhou was being paid
amounts due under outstanding purchase orders and that the
defendants had set up automatic payments for payment of
past contracts—so were “interwoven with” the Cooperation
Agreement. See id. at 683 (concluding that the fraud was in-
terwoven because “[t]he risk of nonpayment was so salient a
No. 21-1839 7
risk that one would expect it to have been dealt with in the
contract”).
While we take as true that the defendants’ statements were
fraudulent (defendants lying that accounts had been set up,
forging bank documents, and claiming they would pay what
was due), as pled, this fraud was all interwoven with the Co-
operation Agreement, so the economic loss doctrine applies.
Accord id. (“[W]hen there are well-developed contractual
means of protecting against risk of nonpayment there is like-
wise no need to provide tort remedies.”).
Taizhou says this conclusion misunderstands the structure
of the parties’ contractual relationship because “the Coopera-
tion Agreement … did not provide any terms for actual pur-
chase or sale of furniture—that was to be conducted through
subsequent purchase order contracts.” But the Cooperation
Agreement did define the structure of the business relation-
ship around the purchase orders, which were to be submitted
for every order, and it was the plaintiffs’ own complaint
which characterized that contract as ongoing at the time the
fraudulent statements occurred. The assertion that the gov-
erning contract itself did not sufficiently protect Taizhou from
risk of nonpayment, so we must look beyond it for such pro-
tections, is not a basis on which we may ignore that governing
contract entirely. Id. (no tort recovery for plaintiff company
that failed to write sufficient risk mitigation terms for a “sali-
ent” risk into its governing contract); see also Wausau Tile, Inc.
v. Cnty. Concrete Corp., 593 N.W.2d 445, 455 (Wis. 1999) (one
“reason for applying the economic loss doctrine is to protect
parties’ freedom to allocate economic risk via contract. … Al-
lowing purchasers to elect recovery under tort theories in-
stead of requiring them to rely on their contractual remedies
8 No. 21-1839
rewrites the agreement by allowing a party to recoup a benefit
that was not part of the bargain.”) (citation omitted).
Taizhou also submits that AFG did not sign the Coopera-
tion Agreement, so the economic loss doctrine at least does
not bar fraud claims against AFG. True enough, AFG did not
sign the Cooperation Agreement. But according to the com-
plaint, Taizhou did have some contract with AFG because it
seeks recovery for breach of that contract. With respect to the
structure of that agreement, Taizhou says in its complaint that
it accepted purchase orders from AFG “[l]ike Z Outdoor,” un-
der the same operating procedures as the Cooperation Agree-
ment. And the complaint positions AFG’s fraud as identical to
Z Outdoor’s fraud, in that it induced Taizhou into “con-
tinu[ing]” the existing relationship to fill more purchase or-
ders. So the well-pleaded facts show that AFG had an unwrit-
ten contract with Taizhou that mimicked at least the purchase-
order structure of the Cooperation Agreement.
B
Taizhou next argues that the economic loss doctrine does
not bar its claim because its losses are not limited to economic
losses: beyond unpaid orders, Taizhou also suffered damage
to its business by devoting additional manufacturing capacity
and procuring additional raw materials. See Kaloti, 699
N.W.2d at 216 (stating that Wisconsin’s economic loss doc-
trine precludes tort recovery only for economic losses). But
Taizhou’s additional losses are clear economic losses under
Wisconsin law. See id. (defining “economic loss” to include
“recovery as a result of … failing to live up to a contracting
party’s expectations”). Taizhou devoted additional capacity
and procured additional raw materials based on expectations
of payment from the defendants, which the defendants failed
No. 21-1839 9
to live up to, and now, as a result, Taizhou has suffered eco-
nomic losses. Accord Wausau Tile, 593 N.W.2d at 456 (holding
that claims for damages involving “failed economic expecta-
tions” are barred by the economic loss doctrine because they
are “the province of contract law”). To the extent the damages
described amounted to lost profits or lost business (or as Tai-
zhou refers to them, “sunk costs,” which are just an input into
the profits equation), those are also economic losses under
Wisconsin law. See id. (holding that “lost business and profits
are indirect losses” that “constitute economic loss … not re-
coverable in tort”).
C
Taizhou also brings a conversion claim, alleging that the
defendants took control over customer payments when they
should have paid some of those amounts over to Taizhou. The
district court held that the economic loss doctrine also barred
this claim. Because we find the economic loss doctrine applies
to this case, and the plaintiffs make no separate argument as
to why it should not apply specifically to the conversion
claim, we affirm the district court’s decision on the conversion
claim.
AFFIRMED