Berg v. Xerxes-Southdale Office Bldg. Co.

• Citation: 290 NW 2d 612
• Decision Date: 29 February 1980
• Docket Number: No. 49733.,49733.
• Parties: Roy A. BERG, et al., Respondents, v. XERXES-SOUTHDALE OFFICE BUILDING CO., etc., Appellant, Western Life Insurance Company, et al., Defendants.
• Court: Minnesota Supreme Court

290 N.W.2d 612 (1980)

Roy A. BERG, et al., Respondents, v. XERXES-SOUTHDALE OFFICE BUILDING CO., etc., Appellant Western Life Insurance Company, et al., Defendants.

No. 49733.

Supreme Court of Minnesota.

February 29, 1980.

Henson & Efron, Robert F. Henson and Stuart T. Williams, Minneapolis, for appellant.

O'Neill, Burke & O'Neill, John B. Burke, Jr., and Michael R. O'Brien, St. Paul, for respondents.

Heard before ROGOSHESKE, KELLY, and TODD, JJ., and considered and decided by the court en banc.

TODD, Justice.

The respondents sought to foreclose a mortgage given to them by the appellant, a limited partnership. The partnership counterclaimed, alleging fraud, and seeking to have the mortgage declared satisfied. Because the trial court believed that the alleged fraudulent acts related to future events and were thus not actionable, and that, even if there had been fraud, it had been waived, the court allowed the mortgage foreclosure. We reverse and remand.

Roy A. Berg and the other respondents formed a limited partnership for the purpose of acquiring, managing, and operating certain commercial property in Edina, Minnesota. Their general partner was McGlynn-Garmaker Company. In 1971, McGlynn-Garmaker, through Richard Garmaker, approached the limited partners and sought additional capital for the completion of a building then under construction. At the same time, Garmaker contacted John G. Mutschler, a licensed nonpracticing attorney, and an accountant, who operated his own consulting business in the field of employee benefit plans. Mutschler had made investments in Garmaker promotions in the past, and Mutschler became interested in this one.

Garmaker showed Mutschler the building which was, although not completed, partially occupied and generating some income. Garmaker, on behalf of respondents, also prepared a pro forma operating statement for 1972 which he showed to Mutschler. The pro forma statement showed a positive cash flow and represented the square footage available for rental. Respondents, however, were in possession of a 1971 financial statement which disclosed a negative cash flow. When respondents declined to invest more money in the building, Mutschler used the pro forma statement to recruit a new limited partnership for which he received a fee of $12,000 from Garmaker. Mutschler also bought one share of the new partnership for $13,000. The new partnership, operating under the name of Xerxes-Southdale Office Building Co., bought out the respondents' interest in the building and gave them a mortgage on the building securing the transfer of interest. The mortgage was due in 1979 and called for payment of quarterly interest installments. McGlynn-Garmaker Company remained the general partner in the new partnership.

The building did not turn a profit, and in late 1973 Garmaker requested that the new limited partnership contribute more capital. This request prompted Mutschler to take an active interest in the partnership. In 1974, Mutschler became concerned over the financial stability of McGlynn-Garmaker Company. In order to avoid the consequences of a bankruptcy proceeding, Mutschler purchased for himself the general partner's share of the business. Upon examining the records of the company, Mutschler discovered the existence of the 1971 financial statement showing the negative cash flow. He also determined that the actual square footage of rental space was less than that shown on the pro forma statement, although this fact was balanced by the fact that the pro forma statement had underestimated the actual rental value of the building on a square foot basis.

Mutschler ceased making quarterly interest payments on the mortgage and called for a meeting with the respondents. He confronted them with the information he then possessed. At that time, he gave them the option of discounting the note or waiting until the business became profitable before they received payment. The respondents rejected this proposal and commenced an action to foreclose the mortgage.¹ In its conclusions of law, the trial court held that the pro forma statement was, at best, an estimate or future projection which precluded it from constituting actionable fraud. The trial court further held that since Mutschler was a sophisticated investor, he was not entitled to rely on the pro forma statement. Lastly, the trial court held that the actions of Mutschler constituted a waiver of any fraud claims and allowed respondents to amend their pleadings after the trial to include the issue of waiver. Judgment was ordered for respondents which included recovery of their principal, interest, costs, and attorneys fees. A mortgage sale was ordered. Xerxes-Southdale appeals the judgment and the order for judgment and the order denying a new trial and allowing the respondents to amend their complaints after trial to include the waiver issue.

The issues presented are:

(1) Was the pro forma statement nonactionable as a matter of law despite the failure to disclose adverse financial data?

(2) Did the limited partners of Xerxes-Southdale unreasonably rely on the pro forma statement as a matter of law?

(3) Did the limited partnership waive its claim of fraud?

(4) Are attorneys fees allowable costs in an appeal from a mortgage foreclosure judgment?

1. The trial court in its conclusions of law stated that pro forma statements are estimates of future events and thus nonactionable. As a general proposition, the trial court was correct in stating that a claim based on fraud must have as one of its elements a statement having to do with a past or present fact. Davis v. Re-Trac Manufacturing Corp., 276 Minn. 116, 117, 149 N.W.2d 37, 38 (1967). In Spiess v. Brandt, 230 Minn. 246, 41 N.W.2d 561 (1950), however, this court recognized that predictions could be fraudulent if they failed to reflect past or present facts. In this case, the existence of the 1971 financial statement was a present fact in the possession of the respondents which could have constituted a touchstone against which to test the predictions...