## Facts

- Chantilly, Inc. owned and rented apartment units in Milwaukee; Abraham Wolinsky was an officer, managing agent, and apartment manager.
- The tenants, James and Mary Schwabe, alleged Wolinsky represented that the lease could be terminated at any time upon 60 days’ written notice.
- The written lease contained no such termination provision, but the Schwabes signed the lease relying on the representation.
- The Schwabes vacated during the lease term after giving 60 days’ written notice.
- Chantilly sued the Schwabes for unpaid rent under the lease.
- In the rent action, the Schwabes asserted fraud in the inducement as an affirmative defense but did not assert a counterclaim for damages.
- The jury found for the Schwabes; judgment dismissed Chantilly’s complaint on the merits and expressly found the lease was fraudulently obtained.
- The Schwabes later filed a separate action seeking compensatory and punitive damages for the same alleged fraud and also asserted malicious prosecution based on the earlier rent suit.
- The trial court struck the fraud causes of action as barred for failure to assert them as counterclaims in the first suit; the Schwabes appealed that order.

## Issues

1. Whether tenants who prevailed on fraud in the inducement as an affirmative defense in a prior rent action are barred from later suing for damages for the same fraud because they did not assert the fraud claim as a counterclaim in the first action.

## Decision

- The Wisconsin Supreme Court reversed the order striking the fraud causes of action and remanded.
- The court held the later fraud damages action was not barred because the relevant counterclaim was permissive under Wisconsin law.
- The prior adjudication that the lease was fraudulently obtained did not preclude the later damages claim; it established the fraud issue in the tenants’ favor.

## Legal Principles

- When counterclaims are permissive by statute, a defendant’s failure to assert a related counterclaim in the first action does not, by itself, bar a later independent action on that claim.
- Issue preclusion applies to issues actually litigated and decided; a prior finding in a defendant’s favor may support (rather than defeat) a later action requiring the same factual determination.
- Courts will not impose a judge-made compulsory counterclaim rule, or expand claim-preclusion doctrine to create forfeiture, where the legislature has treated counterclaims as permissive.

## Conclusion

A tenant who successfully defeats a landlord’s rent claim by pleading fraud in the inducement as an affirmative defense may later bring a separate action for damages based on that fraud when applicable law makes the counterclaim permissive, and the earlier judgment does not bar the later claim.


Schwabe v. Chantilly, Inc., 67 Wis. 2d 267, 226 N.W.2d 452 (Wis. 1975)