Business Fraud Claims in Minnesota: Suing or Defending

What Must a Business Prove to Win a Fraud Claim in Minnesota?

A business must prove a false statement of a past or existing material fact, made knowingly or recklessly, to induce reliance, that the business relied on, and that cost it money. The Minnesota Supreme Court set out the five elements in Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 2007), quoting an earlier decision:

1. A false statement of fact. “a false representation by a party of a past or existing material fact susceptible of knowledge.”
2. Knowledge or recklessness. The statement was “made with knowledge of the falsity of the representation or made as of the party’s own knowledge without knowing whether it was true or false.” A business that states a fact as true without knowing whether it is true can be liable.
3. Intent to induce. It was made “with the intention to induce another to act in reliance thereon.”
4. Reliance. “the representation caused the other party to act in reliance thereon.” Hoyt adds that a plaintiff “must set forth evidence demonstrating both actual and reasonable reliance.”
5. A money loss. The business suffered “pecuniary damage as a result of the reliance.”

When people contact me about a fraud, I ask how much money it cost them. Some lost nothing because they caught the fraud in time, and a claim for fraud damages requires the money loss in element 5.

When Does a Promise or Opinion Become Fraud?

A broken promise becomes fraud only when the business that made it had no intention of keeping it at the time. A pure legal opinion is not actionable. A mixed statement of law and fact may be, when it implies that facts exist to justify the legal conclusion and the other party would ordinarily have no knowledge of the facts. In Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009), the Minnesota Supreme Court quoted Vandeputte v. Soderholm, 216 N.W.2d 144 (Minn. 1974): “It is true that a misrepresentation of a present intention could amount to fraud. However, it must be made affirmatively to appear that the promisor had no intention to perform at the time the promise was made.”

Valspar involved a paint supplier and a truck-bed lid maker that both knew of paint problems before signing a supply contract. The supplier’s assurances were, in the court’s words, “expressions of confidence that the paint application problems would be resolved, and thus were predictions of future results.” The court found no evidence that the supplier never intended to fix the problems and held that the fraud claim failed on that ground, and on reliance as well.

Statements about the law follow a similar line. Hoyt repeated a rule the court of appeals had noted, drawn from an earlier decision: “abstract statements of law or pure legal opinions are not actionable; however, a mixed statement of law and fact may be actionable “if it amounts to an implied assertion that facts exist that justify the conclusion of law which is expressed” and the other party would ordinarily have no knowledge of the facts.” In Hoyt, a landlord’s owner asked a parent company’s attorney during settlement talks whether there was any reason to pierce the corporate veil. The attorney allegedly answered “There isn’t anything” and said the parent and its subsidiary were “totally separate.” Viewing the evidence in the landlord’s favor at summary judgment, the court read the answer as “a representation that no facts exist that would support a piercing claim,” and it concluded “that the representation is actionable.” I suggest that a buyer ask which current facts support any forecast or assurance, because a false statement of a current fact can support a fraud claim when a missed prediction cannot.

When Does Silence Count as Fraud in a Business Deal?

Silence is generally not fraud in Minnesota, because one business has no general duty to disclose material facts to the other side of a deal. A special circumstance can create a duty to disclose. In Klein v. First Edina National Bank, 196 N.W.2d 619 (Minn. 1972), the court stated: “As a general rule, one party to a transaction has no duty to disclose material facts to the other. However, special circumstances may dictate otherwise.” It gave three examples:

1. Half-truths. “One who speaks must say enough to prevent his words from misleading the other party.”
2. Special knowledge. “One who has special knowledge of material facts to which the other party does not have access may have a duty to disclose these facts to the other party.”
3. Trust relationships. “One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts.”

Klein arose when a bank customer pledged her stock as security for her employer’s loan, and the court found no relationship that required the bank to explain the loan’s details to her. The court introduced the three circumstances with “For example,” so the list gives examples rather than a complete set.

How Do Courts Decide Whether Reliance Was Reasonable?

Reliance is reasonable unless the listener knew the statement was false or its falsity was obvious, but a business that investigated the point before signing may be unable to claim reliance. In Hoyt, the court stated: “We have held that a party can reasonably rely on a representation unless the falsity of the representation is known or obvious to the listener.” The listener, it added, “is not under an obligation to conduct an investigation and thus may rely on the representation so long as it is not known by the listener to be false and is not obviously false.” Whether reliance was reasonable “is ordinarily a fact question for the jury unless the record reflects a complete failure of proof.” The landlord’s owner in Hoyt was an attorney with business experience, and the court still sent the reliance question to trial.

Valspar shows the other side. Reliance, the court said, “is generally evaluated” in light of the party’s “intelligence, experience, and opportunity to investigate the facts at issue.” The court continued: “When a party conducts an independent factual investigation before it enters into a commercial transaction, that party cannot later claim that it reasonably relied on the alleged misrepresentation.” It applied that rule to two “sophisticated business equals” where the buyer had tested the paint before signing.

What Changes When the Claim Is Negligent Misrepresentation?

Negligent misrepresentation requires only carelessness, not intent, but it also requires a duty of care, and comparative fault applies to it. Valspar described the claim: a person acting in business, or in a transaction in which it has a financial interest, “supplies false information for the guidance of others in their business transactions,” another “justifiably relies on the information,” and the person “has failed to exercise reasonable care in obtaining or communicating the information.” For a side-by-side view, see how fraud and negligent misrepresentation differ.

Three limits apply to a business claimant:

1. Duty. In Williams v. Smith, 820 N.W.2d 807 (Minn. 2012), the Minnesota Supreme Court called a duty of care “a threshold requirement.” It held that no duty arose in a prospective government job negotiated at arm’s length by sophisticated parties, and it noted that the court had “declined to decide whether a negligent misrepresentation claim can be brought by a party to an arm’s-length commercial transaction.” The Minnesota Court of Appeals had already decided the question in Safeco Insurance Co. of America v. Dain Bosworth Inc., 531 N.W.2d 867 (Minn. App. 1995). It held, “based on the undisputed facts of this case,” that the bond underwriter owed the insurer backing the deal no duty “beyond honesty,” because the underwriter “was selling a deal to Safeco, and not supplying information for the guidance of Safeco,” and the two “were sophisticated equals negotiating a commercial transaction.” The court added: “In other commercial relationships, for example between parties to a contract, the aggrieved party is limited to suit in contract or in fraud.”
2. Goods. Under Minn. Stat. § 604.101, subd. 4, “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.” Goods are “tangible personal property” under subd. 1(c), and subd. 6 applies the section when both sales “occurred on or after August 1, 2000.” Valspar held that a buyer of goods “is barred from bringing a common-law negligent misrepresentation claim against the seller that relates to the goods sold.” This statute is Minnesota’s codified economic loss doctrine.
3. Comparative fault. In Florenzano v. Olson, 387 N.W.2d 168 (Minn. 1986), a customer’s suit over an insurance agent’s advice, the Minnesota Supreme Court held “that the principles of comparative responsibility apply to negligent misrepresentation,” and it stated that “principles of comparative negligence would not apply to an intentional tort.” Under Minn. Stat. § 604.01, subd. 1a, “Fault” includes acts or omissions “that are in any measure negligent or reckless toward the person or property of the actor or others.” Under § 604.01, subd. 1, “Contributory fault does not bar recovery” of damages for economic loss “if the contributory fault was not greater than the fault of the person against whom recovery is sought, but any damages allowed must be diminished in proportion to the amount of fault attributable to the person recovering.”

For more on the elements and defenses of negligent misrepresentation, including who owes a duty of care, the dedicated page covers each.

When Can a Business Use the Minnesota Consumer Fraud Act?

The Minnesota Consumer Fraud Act can reach a one-on-one purchase of a business or other merchandise. A business suing for damages and reasonable attorney’s fees under Minn. Stat. § 8.31, subd. 3a must show its lawsuit benefits the public. A family farmer injured in a sale “for personal, family, household, or agricultural purposes” has a second route under Minn. Stat. § 325F.70, subd. 3, discussed below. Minn. Stat. § 325F.69, subd. 1 makes enjoinable “any fraud, unfair or unconscionable practice, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise, whether or not any person has in fact been misled, deceived, or damaged thereby.” Under § 325F.70, subd. 1, a suit for that injunction is brought by “The attorney general or any county attorney.” A business’s own claim, for damages or “other equitable relief,” runs through § 8.31, subd. 3a, which requires that it be “injured by a violation,” discussed below.

In Hoang Minh Ly v. Nystrom, 615 N.W.2d 302 (Minn. 2000), the seller of a restaurant misrepresented its monthly profits and condition to the buyer. The court held that “a one-on-one transaction for the purchase of a business for operation and not resale” falls within § 325F.69. It also recounted its observation in an earlier decision that the Act “is not expressly limited to individual consumers and has not been interpreted that way by the courts.”

The private claim runs through Minn. Stat. § 8.31, subd. 3a, which lets “any person injured by a violation” of the Act “recover damages, together with costs and disbursements, including costs of investigation and reasonable attorney’s fees.” Ly limited that remedy: “we hold that the Private AG Statute applies only to those claimants who demonstrate that their cause of action benefits the public.” The restaurant buyer proved common-law fraud in a single sale and recovered no attorney’s fees.

A 2023 amendment added a separate private action in Minn. Stat. § 325F.70, subd. 3, which states that “An action brought under this section benefits the public.” It covers a sale “for personal, family, household, or agricultural purposes,” and a “consumer” there is “a natural person or family farmer.” A “family farmer” there is “a person or persons operating a family farm,” and Minn. Stat. § 116B.02, subd. 6 defines a family farm as “any farm owned by a natural person, or one or more natural persons all of whom are related within the third degree of kindred according to the civil law, at least one of whose owners resides on or actively operates said farm.” A business outside those definitions relies on § 8.31, subd. 3a.

When the deal was a sale of stock or another security, Minn. Stat. § 80A.76(b) adds a separate claim against a seller who sells “by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statement made, in light of the circumstances under which it is made, not misleading,” with “the purchaser not knowing the untruth or omission,” and it carries its own remedies. The claim depends on a “security,” and under Minn. Stat. § 80A.41(30)(E) that term “does not include any equity interest of a closely held corporation or other entity with not more than 35 holders of the equity interest of such entity offered or sold pursuant to a transaction in which 100 percent of the equity interest of such entity is sold as a means to effect the sale of the business of the entity if the transaction has been negotiated on behalf of all purchasers and if all purchasers have access to inside information regarding the entity before consummating the transaction.” The seller avoids liability by proving it “did not know and, in the exercise of reasonable care, could not have known of the untruth or omission.” Under subsection (j), relief “under subsection (b), other than for violation of section 80A.49,” requires that “the action is instituted within the earlier of two years after discovery of the facts constituting the violation or five years after the violation.” Check the current text of § 80A.76 before relying on these periods.

What Can a Defrauded Business Recover?

A defrauded business generally recovers its out-of-pocket loss, not the profit it expected from the deal. For a sale of goods, Minn. Stat. § 336.2-721 provides that “Remedies for material misrepresentation or fraud include all remedies available under this article for nonfraudulent breach,” and the buyer’s damages for accepted goods are in Minn. Stat. § 336.2-714. In B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180 (Minn. 1988), the court stated: “Minnesota subscribes to the rule that in transactions giving rise to a misrepresentation action, the damages are to be measured by “out-of-pocket” loss.” That loss is “the difference between the actual value of the property received and the price paid for the property, along with any special damages naturally and proximately caused by the fraud prior to its discovery, including expenses incurred in mitigating the damages.” The court added: “In this state we do not subscribe to the “benefit-of-the-bargain” rule.”

Goodrich also recognized an exception. A tire maker had intentionally misrepresented that it would keep supplying a dealer, the dealer did not look for another supplier, and the dealer lost its business without any out-of-pocket loss. The court explained that the rule “works less well where, as in this case, defendant’s misrepresentation prevents plaintiff from taking measures to protect the value of property it already has.” Answering a certified question, the court held that “the trial court properly allowed plaintiff to recover its economic loss from the destruction of the business, measured by the value of the business before the misrepresentation” and the value after.

Other remedies a fraud claimant may seek:

1. Undoing the deal. In Hoyt, the landlord sued to rescind a signed settlement release on the ground that fraud induced it, and the Supreme Court sent the claim back to the district court for trial. In Gaertner v. Rees, 107 N.W.2d 365 (Minn. 1961), where buyers of a gas-station property sought rescission over misstated tax estimates, the Minnesota Supreme Court stated: “The right to rescind must be exercised promptly upon discovery of the facts from which it arises for the reason that under the law it may be waived by continuing to treat the contract as a subsisting obligation.” The court affirmed for the sellers on findings that the tax estimate did not induce the purchase. For a sale of goods, Minn. Stat. § 336.2-721 provides that “Neither rescission or a claim for rescission of the contract for sale nor rejection or return of the goods shall bar or be deemed inconsistent with a claim for damages or other remedy.” Contract terms that limit remedies in a sale of goods are governed by Minn. Stat. § 336.2-719.
2. Punitive damages. Minn. Stat. § 549.191 provides that “the complaint must not seek punitive damages.” A party may later move to add them, and the motion “must be accompanied by one or more affidavits showing the factual basis for the claim.” The court grants the motion “if the court finds prima facie evidence in support of the motion.” Under Minn. Stat. § 549.20, subd. 1(a), punitive damages are allowed “only upon clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others.” Against a company, subd. 2 allows punitive damages for an agent’s act only on listed conditions, including when “the agent was employed in a managerial capacity with authority to establish policy and make planning level decisions for the principal and was acting in the scope of that employment.”
3. Attorney’s fees. Each side pays its own attorney unless a contract or statute shifts fees. Ly restated the rule: “We have long held that attorney fees are not recoverable in litigation unless there is a specific contract permitting or a statute authorizing such recovery.”

How Does a Business Defend Against a Fraud Claim?

A business accused of fraud defends by testing points including the complaint’s detail, each of the five elements, and the damages. The points to examine:

1. The pleading. Minn. R. Civ. P. 9.02 provides: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.” A complaint must identify the circumstances of the alleged fraud, a requirement covered in more depth on the page on pleading fraud with particularity.
2. The statement. A prediction or a promise made in good faith is not a false statement of existing fact under Valspar, and a pure legal opinion is not actionable under Hoyt.
3. Reliance. Evidence that the claimant investigated the point before signing supports the Valspar defense, though Hoyt treats reasonableness as ordinarily a question for the jury.
4. The loss. Under Goodrich’s out-of-pocket rule, damages compare the actual value received with the price paid, plus special damages before discovery, so evidence of the value received is central. Where the misrepresentation “prevents plaintiff from taking measures to protect the value of property it already has,” Goodrich allowed the claimant to recover the value of its business before the misrepresentation and after. For a sale of goods, § 336.2-721 makes every remedy the Uniform Commercial Code’s sales provisions give for a nonfraudulent breach available for material misrepresentation or fraud, as the damages section explains.
5. The deadline. Under Minn. Stat. § 541.05, subd. 1, “Except where the Uniform Commercial Code otherwise prescribes, the following actions shall be commenced within six years” and the list includes “(6) for relief on the ground of fraud, in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” In Toombs v. Daniels, 361 N.W.2d 801 (Minn. 1985), a trust beneficiary’s suit against trustees, the Minnesota Supreme Court stated: “The 6-year period begins to run when the facts constituting fraud were discovered or, by reasonable diligence, should have been discovered.” The court added: “Delay in discovering fraud may be excusable when a confidential relationship exists.” Check the current text of § 541.05 before relying on this period.
6. Negligent claims. A seller of goods can raise § 604.101, subd. 4 against a buyer’s negligent misrepresentation claim “relating to the goods sold or leased.” A business that was selling a deal to a sophisticated equal, rather than supplying information for its guidance, can raise Safeco’s no-duty holding. Under Florenzano, the business can also raise the claimant’s own fault against a negligent misrepresentation claim, and § 604.01, subd. 1a defines fault to include acts or omissions “in any measure negligent or reckless toward the person or property of the actor or others.”
7. Fee exposure. A claimant seeking fees under § 8.31, subd. 3a must show the public benefit Ly requires.

What Are the Options Besides a Fraud Lawsuit?

An owner on either side of a fraud dispute can choose among a direct conversation, a written demand, a negotiated adjustment, and a lawsuit, and each fits different facts. Each side pays its own attorney unless a contract clause or statute shifts fees, so the cost of each path belongs in the decision beside the merits.

1. An owner-to-owner conversation. This fits when the business relationship still has value to both sides and the misstatement may have been a mistake. Its risk is an informal fix that nobody writes down.
2. A written demand. A letter naming the statement, who made it, when, and the loss gives the other business a concrete claim to answer. Its risk is that it signals a dispute and may end the relationship. A later complaint must meet Rule 9.02, under which “the circumstances constituting fraud or mistake shall be stated with particularity.”
3. A negotiated price adjustment or unwinding. This fits when the out-of-pocket loss can be measured, such as a gap between the price paid and the value received. Under Gaertner, discussed above, the right to rescind “must be exercised promptly upon discovery of the facts from which it arises.” I suggest putting any settlement in a signed agreement with a release, because the release is what ends the claim.
4. A lawsuit. This fits when the loss is large and the five elements can be proved from documents, emails, and witnesses.

For an accused business, the same options apply in reverse: correcting a misstatement, offering an adjustment, or defending in court. I suggest that both sides keep the emails, drafts, and notes from the negotiation, because a fraud dispute turns on what was said, when, and by whom.

Bringing or Answering a Business Fraud Claim

A Minnesota fraud claim between businesses turns on five elements, including reasonable reliance and a measurable money loss. The Consumer Fraud Act adds remedies on the conditions set by Ly and § 325F.70, subd. 3, and punitive damages are available on the conditions in § 549.191 and § 549.20. For related claims between businesses, see my business torts practice. If your company is weighing a fraud claim against another business or answering one, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents.