Safeco Ins. Co. of America v. Dain Bosworth Inc., C1-94-2317

• Decision Date: 16 May 1995
• Docket Number: No. C1-94-2317,C1-94-2317
• Citation: 531 N.W.2d 867
• Parties: SAFECO INSURANCE COMPANY OF AMERICA, a Washington corporation, Appellant, v. DAIN BOSWORTH INCORPORATED, a Delaware corporation, Respondent.
• Court: Minnesota Court of Appeals

Page 867

531 N.W.2d 867

SAFECO INSURANCE COMPANY OF AMERICA, a Washington

corporation, Appellant, v. DAIN BOSWORTH INCORPORATED, a Delaware corporation, Respondent.

No. C1-94-2317.

Court of Appeals of Minnesota.

May 16, 1995.

Review Denied July 20, 1995.

Syllabus by the Court

Here there are no genuine issues of material fact concerning whether the bond underwriter, while negotiating with a credit enhancer, owed the credit enhancer a duty for purposes of the tort of negligent misrepresentation.

Robert L. Meller, Jr., Sarah C. Madison, Best & Flanagan, Minneapolis, B. David Thomas, pro hac vice, Bellevue, WA, for appellant.

Lawrence C. Brown, Robert L. Schnell, Jr., Jeffrey D. Hedlund, Karen E. Wilson, Faegre & Benson, P.L.L.P., Minneapolis, for respondent.

Considered and decided by DAVIES, P.J., and RANDALL and MULALLY, ^* JJ.

OPINION

RANDALL, Judge.

FACTS

The city of Minneapolis and the Minneapolis Community Development Agency each issued revenue bonds in 1983 to finance the renovation of a factory into a design center and furniture mart. The facility was named International Market Square (IMS). Dain was the co-underwriter of these bonds. The 1983 bonds went into default.

The IMS Developers wanted to refinance these bonds. The IMS Developers and Dain sought to issue "refunding" bonds that would be insured by a third party, called a credit enhancer. Dain solicited potential credit enhancers by sending background information regarding the IMS project to financial institutions and insurance companies, including Safeco Insurance Company of America.

Safeco examined the IMS project. Safeco had its own surety bond credit analysts investigate the transaction and Safeco conducted its own underwriting analysis. Shenehon & Associates, Inc. (Shenehon) and Robert Strachota prepared an appraisal of the IMS project. After a period of negotiation, during which Dain and Safeco were represented by separate legal counsel, the parties consummated a refinancing transaction.

In the agreement, the City of Minneapolis issued $9.77 million worth of Commercial Development Revenue Refunding Bonds on August 21, 1989, and $9.73 million of Commercial Development Refunding Bonds on October 2, 1989. Safeco provided credit enhancement, and in return for $1.5 million in premiums over five years, Safeco provided surety bonds which guaranteed payment on the 1989 refunding bonds if the IMS Developers defaulted, which they did.

Safeco was called on to guarantee payment and has done so. Safeco then commenced suit against Shenehon, Strachota, Dain, and the IMS Developers. Safeco alleged malpractice and negligent misrepresentation against Shenehon and Strachota. Safeco alleged negligent misrepresentation and intentional fraud against Dain. Safeco settled its claims against the IMS Developers and those issues are not before us.

Dain moved for summary judgment on the negligent misrepresentation claim. Dain argued that Safeco failed to raise genuine issues of material fact supporting such a claim. Dain also moved to dismiss the intentional fraud claim for failure state a claim upon which relief could be granted and for failure to plead fraud with particularity.

The district court granted Dain's motion for summary judgment on the negligent misrepresentation claim, concluding Dain did not owe a duty to Safeco beyond honesty. The district court also concluded that Safeco did not reasonably rely on Dain. The district court dismissed Safeco's intentional fraud claim, concluding Safeco did not plead fraud with sufficient particularity, but allowed Safeco to file an amended complaint on its intentional fraud claim.

Safeco moved for relief from judgment, but the district court denied this motion. Safeco then filed its notice of appeal, addressing the district court's entry of summary judgment against it on the negligent misrepresentation claim, and the district court's order denying relief from judgment. Dain moved to strike portions of Safeco's brief on appeal, arguing they were outside the record.

ISSUES

1. Are there genuine issues of material fact surrounding whether Dain owed a legal duty to Safeco for purposes of a negligent misrepresentation tort? Did the district court correctly apply the law?

2. Did the district court abuse its discretion in denying Safeco's motion for relief from judgment?

3. Are documents submitted with Safeco's motion for relief from judgment outside the record on appeal?

ANALYSIS

On appeal from summary judgment, the reviewing court must determine whether there are any genuine issues of material fact and whether the district court erred in its application of the law. See State by Cooper v. French, 460 N.W.2d 2, 4 (Minn.1990). A motion for summary judgment shall be granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that "there is no genuine issue of material fact and that either party is entitled to judgment as a matter of law." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993). The reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted. Id.

1. Negligent Misrepresentation

Persons making representations are negligent when they have not discovered or communicated certain information that the ordinary person in his or her position would have discovered or communicated. Florenzano v. Olson, 387 N.W.2d 168, 174 (Minn.1986). Proof of the subjective state of the misrepresenter's mind is not needed to prove negligence. Id. Negligence is proved by measuring the misrepresenter's conduct against an objective standard of reasonable care. Id.

In Minnesota, one making representations is held to this duty of care when supplying information for the guidance of others in the course of a transaction in which one has a pecuniary interest, or in the course of one's business, profession or employment. Id.; accord L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372, 378 n. 2 (Minn.1989). This definition of negligent misrepresentation parallels that of the Restatement (Second) of Torts § 552. ¹ Bonhiver v. Graff, 311 Minn. 111, 121-22, 248 N.W.2d 291, 298-99 (1976).

In L & H Airco, the supreme court stated:

Under general concepts of tort law, "duty" is defined as an " 'obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct toward another.' "

446 N.W.2d at 378 (quoting Rasmussen v. Prudential Ins., 277 Minn. 266, 268, 152 N.W.2d 359, 362 (1967), which in turn quoted Prosser, Torts § 53 (3d ed. 1964)). The essential question in determining whether a defendant owes a duty is "whether the plaintiff's interests are entitled to legal protection against the defendant's conduct."

Dain argues that it did not owe a duty to Safeco because they were both sophisticated parties negotiating a deal at "arm's length," and that there was no "special relationship" between them justifying such a duty. Dain also argues that under the language of the Restatement, it was not supplying information for the "guidance" of Safeco.

This is a case of first impression in Minnesota. While Minnesota cases have discussed negligent misrepresentation, and laid out circumstances where some parties have owed a duty to certain plaintiffs, they have not squarely addressed the issue here. See, e.g., M.H. v. Caritas Family Servs., 488 N.W.2d 282, 288 (Minn.1992) (holding that adoption agency could owe a duty to prospective parents); L & H Airco, 446 N.W.2d at 379 (holding that an attorney does not owe a duty to the client's adversary); Florenzano, 387 N.W.2d at 174-75 (holding that an insurance agent does owe a duty to his or her client); Bonhiver, 311 Minn. at 123, 248 N.W.2d at 299 (holding that an accounting firm could be liable for negligent misrepresentations it made in its work papers regarding its client); Baker v. Surman, 361 N.W.2d 108, 111 (Minn.App.1985) (holding that an FHA appraiser only owes a duty to the federal government, and not to a prospective home buyer).

Other jurisdictions have addressed this issue and held that where adversarial parties negotiate at arm's length, there is no duty imposed such that a party could be liable for negligent representations. In these situations, the injured party's remedy is to sue either in contract or to sue for intentional misrepresentation. We conclude, based on the undisputed facts of this case, that Dain did not owe a duty to Safeco beyond honesty. We affirm the district court's grant of summary judgment on Safeco's negligent misrepresentation claim. Our decision has no bearing on the merits of Safeco's unlitigated claim for intentional fraud.

Iowa has addressed the area of negligent misrepresentation and section 552. Iowa courts distinguish

misrepresentations made by persons engaged in the business or profession of supplying guidance to others from misrepresentations made during commercial transactions where the parties are dealing at arm's length.

Freeman v. Ernst & Young, 516 N.W.2d 835, 838 (Iowa 1994); accord Meier v. Alfa-Laval, Inc., 454 N.W.2d 576, 581 (Iowa 1990).

The Iowa courts based their conclusions in part on a law review article by Alfred Hill differentiating between a person engaged in the business or profession of supplying guidance to others and those engaged in commercial transactions at arm's length. See Meier, 454 N.W.2d at 581 (citing Alfred Hill, Damages for Innocent Misrepresentation, 73 Colum.L.Rev. 679, 685-86 (1973)).

The Iowa Supreme Court has applied this analysis to loan guarantees, which are analogous to the situation between Safeco and Dain. Haupt v. Miller, 514 N.W.2d 905, 910 (Iowa 1994). The Iowa Supreme Court held that the defendant bank had no duty for purposes of negligent misrepresentation because it was not supplying information for the guidance of the guarantor, but was rather negotiating with the guarantor as part of a commercial transaction. Id. Further, applying Iowa law, the...