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Common Law Fraudulent and Negligent Misrepresentation
Contract Law 2 (LW202)
The University of the South Pacific
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Chapter One
Common Law Fraudulent
Misrepresentation
and Negligent
Misrepresentation
Michael M. Krauss
Greenberg Traurig, LLP Minneapolis
CHAPTER 1 – MISREPRESENTATION SECTION 1.
§ 1 INTRODUCTION
The Great Recession generated a slew of claims for misrepresentation that, 10 years later, remain in litigation. Are plaintiffs casting blame for business decisions that succumbed to an unforgiving market? Or did the financial crisis expose actual misrepresentations that otherwise might have gone unnoticed? These questions have been the fulcrum of fraud cases nationwide. This chapter addresses common law claims of fraudulent and negligent misrepresentation, focusing primarily on intentional misstatements or omissions. In addition to exploring the elements, it discusses strategies that plaintiffs and defendants can use to build their case and tell their story.
§ 1 ELEMENTS OF FRAUDULENT MISREPRESENTATION
Whether it is called common law fraud, fraudulent misrepresentation, or intentional misrepresentation, the ele- ments of the claim are the same. The first three elements largely address the defendant’s conduct or state of mind, and the last two address the plaintiff’s. The elements are: ( 1 ) The defendant made a false representation of a past or existing material fact susceptible of knowledge. ( 2 ) The defendant did so knowing the representation was false, or without knowing whether it was true or false. ( 3 ) The defendant intended to induce the plaintiff to act in reliance on that representation. ( 4 ) The plaintiff acted in reliance on the defendant’s false representation. ( 5 ) The plaintiff suffered pecuniary damage as a result of that reliance. Valspar Refinish, Inc. v. Gaylord’s, Inc. , 764 N 359, 368 (Minn. 2009); Hoyt Props. v. Prod. Res. Grp., LLC , 736 N 313, 318 (Minn. 2007); Specialized Tours, Inc. v. Hagen , 392 N 520, 532 (Minn. 1986). See also Martens v. Minnesota Mining & Mfg. Co. , 616 N 732, 747 (Minn. 2000) (breaking down claim into seven ele- ments); Davis v. Re-Trac Mfg. Corp. , 149 N 37, 38–39 (Minn. 1967) (11 elements).
§ 1 FALSITY
Truth is an absolute defense to a claim of misrepresentation. “It is axiomatic that fraud cannot be predicated on the truth. A true representation is not actionable.” Franklin Theatre Corp. v. City of Minneapolis , 198 N 558, 560 (Minn. 1972) (quoting Rien v. Cooper , 1 N 847, 851 (Minn. 1942)).
§ 1 REPRESENTATION BY AFFIRMATIVE MISSTATEMENT OR BY OMISSION
An affirmative misstatement—saying or writing something that is not true—is the most common form of false representation. But if there is a duty to disclose, silence may also constitute fraud. A failure to speak is actionable if there is a “suppression of facts which one party is under a legal or equitable obligation to communicate to the other, and which the other party is entitled to have communicated to him.” Richfield Bank & Trust Co. v. Sjogren , 244 N 648, 650 (Minn. 1976). The Minnesota Supreme Court has identified three “special circumstances” in which silence may be fraudulent. A. Half-Truth “One who speaks must say enough to prevent his or her words from misleading the other party.” Id. ; see also Heidbreder v. Carton , 645 N 355, 367 (Minn. 2002) (“A duty to disclose may exist ... when disclosure
CHAPTER 1 – MISREPRESENTATION SECTION 1. That said, a statement about the future may give rise to fraud in at least two circumstances. First, a prom- ise to perform may be fraudulent if “the promisor had no intention to perform at the time the promise was made.” Martens v. Minn. Mining & Mfg. Co. , 616 N 732, 747 (Minn. 2000) (quoting Vandeputte , 216 N at 147). “A subsequent intention to break the promise or failure to fulfill it does not constitute fraud.” Benson v. Rostad , 384 N 190, 195 (Minn. Ct. App. 1986). Affirmative evidence of the promisor’s contemporaneous intent is re- quired. Vandeputte , 216 N at 147; Kramer v. Bruns , 396 N 627, 631 (Minn. Ct. App. 1986). Second, predictions or projections may be fraudulent if they fail to “reflect past or present facts.” Berg v. Xerxes-Southdale Office Bldg. Co. , 290 N 612, 615 (Minn. 1980) (positive cash flow projection was actionable where defendant concealed current year’s negative cash flow). Without new facts that would presage a turnaround, optimistic forecasts that are inconsistent with prior or current performance may amount to fraud. The Minnesota Supreme Court stated: “Projections should be considered actionable or not in fraud, depending upon whether they accurately reflect past and present circumstances.” Id. B. Statements of Pure Opinion Expressions of pure opinion do not amount to fraud. “A wide variety of statements ordinarily used in sales negotiations are not actionable as fraud. These include ordinary sales puffing, statements of opinion, and promises of future performance.” Am. Computer Trust Leasing v. Jack Farrell Implement Co. , 763 F. Supp. 1473, 1487 (D. Minn. 1991) (citations to Minnesota law omitted), aff’d , 967 F 1208 (8th Cir. 1992). For example, in American Computer Trust , the defendant’s statements that it was a “proven dealer in data processing” and “capable of dramati- cally increasing efficiency and profitability” were not actionable. Am. Computer Trust , 763 F. Supp. at 1487; see also Smith v. Brutger Cos. , 569 N 408, 414 (Minn. 1997) (same for statements that building was “luxury apartment complex” and a “very safe environment”). C. Statements of Law An abstract statement of law or pure legal opinion likewise cannot be a fraudulent misrepresentation. Hoyt , 736 N at 318. “[T]he law is presumed to be equally within the knowledge of both parties.” Miller v. Osterlund , 191 N. 919, 919 (Minn. 1923). There are two exceptions, however. A general statement of law may be action- able when the speaker either “is learned in the field and has taken advantage of the solicited confidence of the party defrauded,” or “stands with reference to the person imposed upon in a fiduciary or other similar relation of trust and confidence.” Northernaire Prods., Inc. v. Cnty. of Crow Wing , 244 N 279, 281 (Minn. 1976) (quoting Stark v. Equitable Life Assurance Soc’y , 285 N. 466, 469 (Minn. 1939)). Additionally, a legal opinion that also “carries an implication of fact” may be actionable. Hoyt , 736 N at 318. A mixed statement of law and fact may give rise to a fraud claim if: (1) it implies that facts exist that support the legal opinion expressed; and (2) the other party would ordinarily have no knowledge of those facts. Id. (allowing fraud claim to proceed where attorney stated there was no way to pierce the corporate veil, thereby implying that no facts existed to support veil piercing).
§ 1 DIRECT CONTACT NOT REQUIRED
The defendant need not communicate the misrepresentation directly to the plaintiff and may retain responsibil- ity for false statements communicated through a third party. If the defendant knows and intends that the third party will relay the misrepresentation to the plaintiff, the defendant may be liable for fraud. Personal contact between the plaintiff and the defendant is not required. See Vikse v. Flaby , 316 N 276, 284 (Minn. 1982) (corporate officers and directors were liable for false statements to broker who passed on misinformation to potential investors); see also
SECTION 1 BUSINESS DISPUTES: CLAIMS AND REMEDIES Luckey v. Alside, Inc. , 245 F. Supp. 3d 1080, 1094 (D. Minn. 2017) (discussing Vikse and related rule from Restate- ment (second) of toRts § 533).
§ 1. 7 MATERIALITY
A lie that has no impact on the listener does not amount to fraud. The false representation must affect the plain- tiff’s ultimate decision and conduct. “A statement of fact is material if it would naturally affect the conduct of the party addressed.” Yost v. Millhouse , 373 N 826, 830 (Minn. Ct. App. 1985). In this formulation, materiality overlaps with actual and reasonable reliance. “If a party is justified in his belief that a representation is true and this belief substantially affects his decision to act, the representation is material.” Nave v. Dovolos , 395 N 393, 398 (Minn. Ct. App. 1986) (citing PRosseR and Keeton on the Law of toRts § 108 (5th ed. 1984)); see also Sit v. T&M Props. , 408 N 182, 186 (Minn. Ct. App. 1987) (representation is material “if it influenced a party’s judgment or decision”); CIVJIG 57 (“A fact is material if it would have influenced the other person’s judgment or decision had (he) (she) known about it.”).
§ 1. 8 FRAUDULENT INTENT
To be liable for fraudulent misrepresentation, a defendant need not mean to hurt anyone. The defendant who mis- represents his assets to obtain a loan, or overstates her customer base to close a deal, may believe nothing will come of the lie. With the loan proceeds, the defendant generate the revenue to service the debt. Or, with the deal closed, the defendant can attract the customers she claimed to have. In many instances, the defendant expects that its coun- terparty will be fully paid, and even profit. But when the transaction goes south for whatever reason, the defendant’s expectations at the outset are no defense to fraud. There are two components to the defendant’s intent. First, what did the defendant know about the truth or fal- sity of his or her representation? “Fraudulent intent is, in essence, dishonesty or bad faith.” Florenzano v. Olson , 387 N 168, 173 (Minn. 1986). A defendant is dishonest when he or she makes a representation known to be false. Id. A defendant acts in bad faith when he or she speaks without knowing whether the statement is true or false. Id. The Minnesota Supreme Court explained: “Fraudulent intent is also present when a misrepresenter speaks posi- tively and without qualification, but either is conscious of ignorance of the truth, or realizes that the information on which he or she relies is not adequate or dependable enough to support such a positive, unqualified assertion.” Id. Second, did the defendant intend for the listener to act in reliance on the false misrepresentation? The intent-to- induce element may be satisfied where the defendant had reason to expect that the plaintiff would alter its conduct based on the misrepresentation and was substantially certain that the plaintiff would do so—even if the defendant did not actually intend for the plaintiff to alter its conduct. See TCI Bus. Capital, Inc., v. Five Star Am. Die Casting, LLC , 890 N 423, 433 (Minn. Ct. App. 2017) (citing Restatement (second) of toRts § 531 (1977)). The facts of TCI Business Capital demonstrate how a defendant may be liable for fraud without meaning to hurt anyone. TCI’s former chief restructuring officer (CRO) falsified TCI’s books to show that a customer’s debt was less than half of what the customer actually owed. Id. The CRO testified that he falsified the records because he wanted his supervisors to believe he was doing a good job, and he had his own plan to collect even beyond his bosses’ ex- pectations. Id. But the CRO was fired for unrelated reasons. Id. Unaware of the inaccuracy in its books, TCI settled with the customer for a fraction of the actual outstanding amount. Id. TCI later discovered the CRO’s scheme and sued him, in part, for fraudulent misrepresentation. Id. The CRO testified that he never intended for TCI to settle in reliance on the inaccurate records; instead, he intended to recover the full amount. Id. at 435.
SECTION 1 BUSINESS DISPUTES: CLAIMS AND REMEDIES fendant as greedy or immoral. As discussed earlier, a common narrative is the defendant who is desperate to keep their business afloat. Jurors can sympathize with a defendant who made a bad choice, but they should still find the defendant liable for fraud. B. Showing an Innocent State of Mind On the flip side, the defendant should develop a competing narrative showcasing his or her innocent state of mind. It rarely suffices to tackle the alleged misrepresentations one by one—e., the first was technically true, the plaintiff did not actually rely on the second, the third was mere puffery, and so on. The plaintiff always bears the burden of proof. But jurors—and judges on summary judgment—should understand the defendant’s view of the big picture. 1. Lack of Motive If possible, a defendant should demonstrate there was no motive to defraud. For example, a sales agent may be accused of making a false representation to earn a commission. Why would a broker risk his or her all- important reputation just to earn a commission that is a fraction of annual compensation? 2. Knowledge at the Time, Not in Hindsight In another scenario, subsequent events may establish beyond dispute that the defendant’s prior represen- tations were false. The defendant should then focus the judge and jury on what it knew and understood at the time, no matter what happened next. For example, the defendant may be the middleman who caused the plaintiff to do busi- ness with a now-insolvent company whose insiders have been exposed as criminals. How can the defendant counter accusations that it knowingly misrepresented the insolvent company’s financial condition? The defendant may try to develop a narrative that it too was misled. While the insiders’ misconduct may now be public, no one knew about it at the time. Instead, the defendant relied on market indicators—such as stock price, credit ratings, independent audit re- ports, and blue-chip clientele—that reflected a healthy and profitable company. To the extent the plaintiff now alleges that the defendant knew of “red flags” suggesting fraud, the plaintiff has the benefit of hindsight: at the time, those same facts were insignificant against the backdrop of the company’s sterling reputation and strong performance. The defendant can strengthen its story if it also lost money in its own dealings with the company. 3. Focus on the Plaintiff A fraud defendant will typically spotlight the plaintiff’s own conduct, knowledge, and motives. As detailed below, the plaintiff’s experience, savvy, and intelligence is central to evaluating reasonable reliance. If pos- sible, the defendant may want to show that the plaintiff was a sophisticated entity with industry expertise, had access to material information, and itself sought to score a huge profit despite known or knowable risks. Now, the defendant may argue, the plaintiff seeks to blame someone else for the consequences of its own decisions. If the plaintiff had a hand in the fraud, the defendant may invoke the equitable doctrine of in pari delicto. This doctrine “operates to prevent wrongdoers at equal fault from recovering against one another,” and it applies when the plaintiff knowingly and willingly participates in the misconduct. Christians v. Grant Thornton LLP , 733 N 803, 810, 814 (Minn. Ct. App. 2007). It typically comes into play when the plaintiff is a trustee or receiver of a now-insolvent company that perpetrated a fraud, and the earlier corporate misconduct is imputed to the trustee or receiver who now stands in the company’s shoes. Id.
CHAPTER 1 – MISREPRESENTATION SECTION 1. 4. Proactive Investigation A defendant should not wait for discovery to develop the facts that compose its competing narrative. The defendant’s counsel should consider immediately collecting core documents and interviewing key witnesses, before memories fade and employees leave. To ensure that the interview notes and memoranda are not discoverable, outside counsel should conduct the interviews, inform employees that these are privileged and confidential communications for the purpose of providing legal advice, and instruct them not to discuss the litigation among themselves or anyone else.
§ 1. 9 ACTUAL RELIANCE
The plaintiff must actually rely on the false representation to his or her detriment. In other words, the plaintiff must establish that the misrepresentation in fact affected his or her conduct. The misrepresentation need not be the sole cause of the plaintiff’s conduct, but it must have been a “substantial factor” in causing the plaintiff to act. Davis v. Re-Trac Mfg. Corp. , 149 N 37, 39 (Minn. 1967). Where the statement did not alter the plaintiff’s course of action, however, he or she did not rely on it. For ex- ample, in Popp Telecom, Inc. v. American Sharecom , 361 F 482, 491–92 (8th Cir. 2004), the plaintiffs were dis- senting shareholders who failed to prevent a corporate merger; they then sued and alleged that the acquiring corpora- tion made false representations in trying to induce them to sell their shares. However—even though the merger went through—the plaintiffs could not establish actual reliance because they were never convinced to sell their shares and instead voted against the merger. Popp Telecom, Inc. , 361 F at 491–92 (applying Minnesota law). Likewise, there can be no reliance when the plaintiff took the complained-of action before learning of the alleged misrepresentation. Watkins v. Lorenz , 119 N 482 (Minn. 1963); Rien v. Cooper , 1 N 847, 853 (Minn. 1942) (“Fraud cannot be predicated upon a representation made subsequent to the act claimed to have been induced thereby.”).
§ 1. 10 REASONABLE RELIANCE
It is not enough that the plaintiff actually rely on the fraudulent misrepresentation; the plaintiff’s reliance must be reasonable. Hoyt Props. v. Prod. Res. Grp., LLC , 736 N 313, 321 (Minn. 2007). The reasonableness of reliance is a subjective standard that varies by the specific plaintiff. “Reliance in fraud cases is generally evaluated in the context of the aggrieved party’s intelligence, experience, and opportunity to inves- tigate the facts at issue.” Valspar Refinish, Inc. v. Gaylord’s, Inc. , 764 N 359, 369 (Minn. 2009). One standard applies to the individual of limited education who ventures outside of his or her field to do business with a large company, and another to a sophisticated corporation that engages in a typical transaction with a comparable business entity. As the Eighth Circuit put it: “Fraud must be proved with reference to the specific intelligence and experience of the party alleging it.” Children’s Broad. Corp. v. Walt Disney Co. , 245 F 1008, 1020 (8th Cir. 2001) (applying Minnesota law). Reasonableness cannot typically be resolved on summary judgment and usually is a fact-intensive question for the jury to decide—even when the plaintiff is sophisticated, educated, and experienced in the matters at hand. Hoyt , 736 N at 321 (holding that reasonable reliance was a jury question despite plaintiff’s extensive business and legal background). “A party can reasonably rely on a representation unless the falsity of the representation is known or obvious to the listener.” Id. (citing Spiess v. Brandt , 41 N 561, 566 (Minn. 1950)). There is no duty to investigate, id. , but a party who does investigate is held to the results of his or her investigation. “When a party conducts an independent
CHAPTER 1 – MISREPRESENTATION SECTION 1. B. Disclaimers of Reliance In Minnesota, integration clauses and general contractual disclaimers of reliance do not preclude reasonable reliance as a matter of law. A commercial contract typically provides that the written document composes the par- ties’ entire agreement and supersedes all prior agreements, understandings, promises, and the like with respect to the subject matter. In the same vein, the parties expressly disclaim reliance on any representations and warranties that are not included in the written contract. General disclaimers of reliance do not bar claims of misrepresentation under Minnesota law. This reflects a policy choice made many years ago: a party may not escape liability for fraudulent statements by providing in the contract that the other party should not rely on them. “The law should not and does not permit a covenant of immunity to be drawn that will protect a person against his own fraud.” Ganley Bros., Inc. v. Butler Bros. Bldg. Co. , 212 N. 602, 603 (Minn. 1927); see also Nat’l Equip. Corp. v. Volden , 252 N. 444, 445 (Minn. 1934) (“A party who makes fraudulent misrepresentations to induce another to make a contract cannot escape liability for his fraud by incorporat- ing a disclaimer of fraud in the contract.”). The Minnesota Supreme Court most recently affirmed this policy in Sorchaga v. Ride Auto, LLC , 909 N 550 (Minn. 2018). The court held that a seller’s fraudulent misrepresentation about the condition of goods to a consumer prevents the merchant from disclaiming the implied warranty of merchantability. Sorchaga , 909 N at 554–57. Enforcing “as is” disclaimers under these facts would allow a seller “to profit from its fraud and to be effectively granted a license to mislead or conceal facts.” Id. at 556 (internal citation, quotation marks, and brackets omitted). Where the disclaimer is specific to the subject matter of the intentional misrepresentation, it still may not preclude reliance as a matter of law. See Dakota Bank v. Eiesland , 645 N 177, 184–85 (Minn. Ct. App. 2002). Instead, where the plaintiff alleges that the defendant acted with fraudulent intent, the significance of the disclaimer typically is for the jury to decide. Id. ; see also St. Croix Printing Equip. v. Rockwell Int’l Corp. , 428 N 877, 881–82 (Minn. Ct. App. 1988). Even assuming the court declines to rule as a matter of law, is there any reason to include disclaimers of reliance in contracts under Minnesota law? There are at least two. First, disclaimers should factor into the jury’s fact-intensive evaluation of reasonable reliance, particularly where the plaintiff is sophisticated and experienced. The defendant can emphasize that the plaintiff’s assertions of reliance in court are at odds with his or her own representa- tions when executing the contract. The defendant can ask: Was the plaintiff lying then, or lying now? Second, even if the disclaimers do not defeat the fraud claim, they should preclude a claim for breach of contract based on the same misrepresentation, which can yield a greater recovery.
§ 1 1 DAMAGES AND REMEDIES
A. Compensatory Damages Money damages are an essential element of fraud. Nodland v. Chirpich , 240 N 513, 517 (Minn. 1976). Minnesota measures a fraud plaintiff’s damages by his or her out-of-pocket loss—that is, the difference between the value of the property received and the price paid, plus “any special damages naturally and proximately caused by the fraud prior to its discovery, including expenses incurred in mitigating damages.” B. Goodrich Co. v. Mesabi Tire Co. , 430 N 180, 182 (Minn. 1988). Minnesota is in the minority. Most states permit a fraud plaintiff to recover the benefit of the bargain—that is, the difference between the value of the property actually received and the value the plaintiff would have received if the representations had been true. Id.
SECTION 1 BUSINESS DISPUTES: CLAIMS AND REMEDIES The “out-of-pocket loss” measurement assumes that the plaintiff received something from the defendant, and paid more than its true value because of the defendant’s false representation. Because not all misrepresentations fit these facts, “Minnesota courts have ... taken a broad view of what constitutes out-of-pocket losses.” Commercial Prop. Invs., Inc. v. Quality Inn Int’l, Inc. , 61 F 639, 647 (8th Cir. 1995). The Eighth Circuit characterized Min- nesota’s approach in practice as a hybrid of “a strict application of the out-of-pocket loss rule and the more liberal benefit-of-the-bargain rule.” Id. ; see also Jensen v. Peterson , 264 N 139, 143 (Minn. 1978) (noting that the court “has been flexible in the past where the strict application of an out of pocket damage rule would fail to do substantial justice”). Where a strict “out-of-pocket” calculation would not return the plaintiff to the status quo, the court may award all economic loss that is the direct and natural consequence of the misrepresentation. Lewis v. Citizens Agency of Madelia, Inc. , 235 N 831 (Minn. 1975). In Lewis , the defendant insurance agent said that the plaintiff’s premium payments would purchase an insurance policy on her husband’s life, when in fact they secured only an an- nuity. A strict out-of-pocket measurement would recover her annuity payments, but not the life insurance proceeds that plaintiff thought she purchased—and now needed. Because refunding the premiums alone would not make the plaintiff whole, she could recover the lost insurance proceeds as her full economic injury. Id. Similarly, in Hughes v. Sinclair Marketing, Inc. , 389 N 194, 199 (Minn. 1986), the Minnesota Supreme Court affirmed an award of lost future profits because out-of-pocket damages would not have returned the plaintiff to the status quo. No matter the measurement, the plaintiff must establish that the false representation proximately caused the damages. Driscoll v. Standard Hardware, Inc. , 785 N 805, 811–12 (Minn. Ct. App. 2012) (affirming dismissal of fraud claim on summary judgment for lack of proximate cause); Bryan v. Kissoon , 767 N 491, 495– (Minn. Ct. App. 2009) (affirming judgment as matter of law on same grounds). B. Rescission Where the plaintiff was fraudulently induced to enter into a contract, the plaintiff may seek to rescind the contract as a remedy for the intentional misrepresentation. U. Installment Realty Co. v. De Lancy Co. , 188 N. 212 (Minn. 1922). Rescission voids the contract and returns the parties to the position they occupied before the contract was formed. Hatch v. Kulick , 1 N 359, 360 (Minn. 1941). While fraud otherwise need be established only by a preponderance of the evidence, the remedy of rescis- sion requires “clear and convincing evidence.” Weise v. Red Owl Stores, Inc. , 175 N 184, 187 (Minn. 1970); Bolander v. Bolander , 703 N 529, 541 (Minn. Ct. App. 2005). “Clear and convincing evidence” is more than a preponderance, “but less than proof beyond reasonable doubt.” Weber v. Anderson , 269 N 892, 895 (Minn. 1978). An alleged victim of fraud must act diligently and promptly in seeking to rescind. Clark v. Reddick , 791 N 292, 294 (Minn. 2010); Hemming v. Ald, Inc. , 155 N 384, 387 (Minn. 1967) (citing principles of waiver, laches, and estoppel); Johns v. McGenty , 23 N 289, 292 (Minn. 1946) (“The power of avoidance from fraud or misrepresentation is lost if, after acquiring knowledge thereof, the injured party unreasonably delays mani- festing to the other party his intention to avoid the transaction.”); Everson v. J. Owens Mfg. Co. , 176 N. 505, 506–07 (Minn. 1920) (the defrauded party “cannot sleep on his rights, but must be reasonably diligent in seeking his remedy, and if he delays beyond a reasonable time, his right to rescind is lost”). A plaintiff waives the right to rescind if, after discovering the alleged fraud, the plaintiff chooses to perform the contract and accept its benefits. Proulx v. Hirsch , 155 N 907, 912 (Minn. 1968); Carpenter v. Vreeman , 409 N 258, 261–62 (Minn. Ct. App. 1987); see also Shell Petroleum Corp. v. Anderson , 253 N. 885, 887
SECTION 1 BUSINESS DISPUTES: CLAIMS AND REMEDIES ( 6 ) the plaintiff was financially harmed by relying on the information (i., suffered pecuniary loss). Hardin Cnty. Sav. Bank , 821 N at 192; Williams v. Smith , 820 N 807, 815 (Minn. 2012); Bonhiver v. Graff , 248 N 291, 298 (Minn. 1976). A. Duty of Care The nature of the parties’ relationship determines whether a duty of care exists in communicating informa- tion. Particular professional or fiduciary relationships can give rise to a duty of care because one party is entitled to legal protection. The Minnesota Supreme Court has “recognized a duty exists in professional relationships such as an accountant/client and an attorney/client, and in certain fiduciary relationships involving, for example, guardians, ex- ecutors, and directors of corporations.” Williams , 820 N at 816 (citing cases). See also Hardin Cnty. Sav. Bank , 821 N at 193–94 (holding that banks stated claim of negligent misrepresentation against appraiser for allegedly faulty appraisal and feasibility study). But the Minnesota Supreme Court has generally hesitated to recognize a duty outside of a professional or fiduciary relationship. The most notable exception is M. v. Caritas Family Services , 488 N 282 (Minn. 1992), where the court held a special legal relationship existed because one party had superior knowledge. There, an adop- tion agency undertook to disclose some information about the birth parents and their genetic history, but withheld other facts that rendered the information misleading. M. , 488 N 282. The supreme court held that public policy favored a duty of care to protect the adoptive parents against the agency’s conduct. Id. More recently, the supreme court stressed the “limited scope of negligent misrepresentation.” Williams v. Smith , 820 N 807, 817 (Minn. 2012). The court wrote, “our recent cases have carefully limited recognition of the tort of negligent misrepresentation, against both private actors and government officials.... These recent decisions are consistent with earlier decisions in which we have rejected an expansive view of both negligent misrepresentation and government liability.” Id. at 821 (citations omitted). In Williams , a would-be assistant coach sued Tubby Smith, the head basketball coach at the University of Minnesota. The plaintiff quit his job on receiving an employment offer from Smith, only to be told the next day that the athletic director nixed the offer. Id. at 809–10. The plaintiff alleged that Smith negligently misrepresented his au- thority to hire. The supreme court found that Smith, as a government employee, owed no duty of care to the plaintiff, as a prospective government employee. Id. at 815–22. The court gave three reasons. First, the plaintiff and Smith did not stand in a professional or fiduciary relationship, Smith was not advising the plaintiff, and Smith did not have superior knowledge or expertise. Id. at 818–19. Second, the nature of the relationship “was that of two sophisticated business people, both watching out for their individual interests while negotiating at arm’s length.” Id. at 819. Third, there was no public policy rationale to impose a duty between sophisticated parties negotiating prospective employ- ment. Id. The Minnesota Court of Appeals similarly has held that no duty of care exists in a commercial transaction “where adversarial parties negotiate at arm’s length.” Smith v. Woodwind Homes, Inc. , 605 N 418, 424 (Minn. Ct. App. 2000) (affirming dismissal of negative misrepresentation claim); see also Safeco Ins. Co. of Am. v. Dain Bosworth, Inc. , 531 N 867, 871 (Minn. Ct. App. 1995) (same). While the Minnesota Supreme Court has side- stepped this issue, it has observed that “other state courts that have considered the issue have not extended the duty of care to an arm’s length commercial transaction.” Williams , 820 N at 817 (citing cases). The court continued: “The underlying reasoning is that sophisticated parties negotiating a commercial transaction are entitled to legal pro- tection only for intentional, fraudulent conduct.” Id. (citing Restatement (second) of toRts § 552 (1979)).
CHAPTER 1 – MISREPRESENTATION SECTION 1. B. Reasonableness of Reliance In considering whether the plaintiff’s reliance on a negligent misrepresentation was reasonable, courts use much the same analysis that applies to reliance on an intentional misrepresentation. But the case law flags at least one significant distinction. A specific written disclaimer that addresses the subject of an intentional misrepresenta- tion typically does not preclude justifiable reliance as a matter of law. With respect to a negligent misrepresentation, however, a specific disclaimer does preclude reliance. For example, in Dakota Bank v. Eiesland , 645 N 177, 183–85 (Minn. Ct. App. 2002), the plaintiff bank alleged that it relied on audited compiled financial statements that it received from the defendant accountants, even though the statements “contained disclaimers clearly stating that the statements were based on the unaudited representations of the company’s management and that the accountants did not express an opinion on them.” The court of appeals held that these disclaimers barred the bank’s negligent misrep- resentation claim, but they did not bar the claim for intentional misrepresentation. Eiesland , 645 N at 183–85. Another example is McIntosh County Bank , in which the Minnesota Court of Appeals held that a specific disclaimer of reliance barred a claim of negligent misrepresentation as a matter of law. McIntosh Cnty. Bank v. Dorsey & Whitney LLP , 726 N 108, 119–20 (Minn. Ct. App. 2007), rev’d in part on other grounds , McIntosh Cnty. Bank v. Dorsey & Whitney LLP , 745 N 538 (Minn. 2008). The case involved a loan participation agree- ment through which various banks purchased interests in a casino loan. The participating banks alleged that the lead lender’s counsel misrepresented the enforceability of the loan. The court of appeals held that any reliance was not jus- tifiable in light of the specific disclaimers in the participation agreement. Id. at 120. The contract required the banks to affirm that they had made “an independent and informed judgment” with respect to the loan, and to acknowledge that the lead lender made no warranty or representation regarding enforceability. Id .; see also Leonard v. Dorsey & Whitney LLP , 553 F 609, 630 (8th Cir. 2009) (under the Minnesota Court of Appeals’ decision in McIntosh , the contractual disclaimer “effectively negates” the justifiability of the participating banks’ reliance). C. Standard of Care, Comparative Fault, and Damages A defendant accused of negligent misrepresentation is held to the standard of care of a reasonably prudent person in the profession. See Florenzano v. Olson , 387 N 168, 174 (Minn. 1986) (“A misrepresentation is made negligently when the misrepresenter has not discovered or communicated certain information that the ordinary per- son in his or her position would have discovered or communicated.”); Grueling v. Wells Fargo Home Mortg., Inc. , 690 N 757, 760 (Minn. Ct. App. 2005) (“An objective standard of reasonable care is applied to those who make misrepresentations in the course of their employment.”). Consistent with this standard of care, “the principles of comparative responsibility apply to negligent mis- representation.” Florenzano , 387 N at 176 (holding that trial court properly applied comparative fault statute). In the same vein, a plaintiff may not recover punitive damages for a negligent misrepresentation. See Utecht v. Shopko Dep’t Store , 324 N 652, 654 (Minn. 1982) (no punitive damages for negligent conduct). The plaintiff may recover only his or her pecuniary loss. Smith v. Brutger Cos. , 569 N 408 (Minn. 1997); Flynn v. Am. Home Prods. Corp. , 627 N 342, 351 (Minn. Ct. App. 2001). D. Economic Loss Doctrine and Minnesota Statutes Section 604. Under Minnesota Statutes section 604, a “buyer may not bring a common law misrepresentation claim against a seller relating to the goods sold or leased unless the misrepresentation was made intentionally or recklessly.” This statute bars a buyer’s negligent misrepresentation claim that relates to the goods sold or leased. Valspar Refin- ish Inc. v. Gaylord’s, Inc. , 764 N 359, 369–70 (Minn. 2009) (holding section 604 barred claim that seller
Common Law Fraudulent and Negligent Misrepresentation
Course: Contract Law 2 (LW202)
University: The University of the South Pacific
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