Negligent Misrepresentation Claims in Minnesota

What Is Negligent Misrepresentation Under Minnesota Law?

In summary, negligent misrepresentation is careless false information given to guide another person’s business decision. In Williams v. Smith, 820 N.W.2d 807 (Minn. 2012), the Minnesota Supreme Court stated the elements: “To prevail on a negligent misrepresentation claim, the plaintiff must establish: (1) a duty of care owed by the defendant to the plaintiff; (2) the defendant supplies false information to the plaintiff; (3) justifiable reliance upon the information by the plaintiff; and (4) failure by the defendant to exercise reasonable care in communicating the information.”

The claim comes from Restatement (Second) of Torts § 552, which the court adopted in Bonhiver v. Graff, 311 Minn. 111, 248 N.W.2d 291 (Minn. 1976). It covers a person who, “in the course of his business, profession or employment, or in a transaction in which he has a pecuniary interest,” supplies false information “for the guidance of others in their business transactions.”

The claim does not make a speaker guarantee everything he or she says. In Florenzano v. Olson, 387 N.W.2d 168 (Minn. 1986), the court stated: “A good faith, non-negligent mistake is not the basis of liability for misrepresentation in this state.” The question is whether the speaker failed to discover or communicate what an ordinary person in that position would have.

When Does a Business Owe a Duty of Care in the Information It Supplies?

A duty arises from the relationship between the parties, and the court decides it as a question of law. Williams calls duty “a threshold requirement” and lists where the Minnesota Supreme Court has found it: professional relationships, certain fiduciary relationships, and “certain special legal relationships in which one party has superior knowledge or expertise.”

The court’s examples in Williams were accountant and client, attorney and client, and fiduciaries such as guardians, executors, and corporate directors. In Florenzano, an insurance agent and would-be financial adviser who told a client to withdraw from Social Security owed a duty. The court added that the same words from a stranger or a neighbor would be only free advice on which the client could not reasonably rely. If the claim is against your own CPA or financial adviser, see suing your accountant or adviser for malpractice.

A duty can reach people who are not the speaker’s client. In Bonhiver, accountants showed their workpapers to state insurance examiners, and the court held: “The defendants’ actual knowledge that the commissioner was relying upon these representations renders them liable for their negligence in making them.” In Hardin County Savings Bank v. Housing & Redevelopment Authority of Brainerd, 821 N.W.2d 184 (Minn. 2012), banks bought bonds relying on an appraisal and feasibility study prepared for the issuer and its underwriter. The court allowed the banks’ negligent misrepresentation claim against the appraiser to proceed past the pleadings.

Disclosing part of the truth can matter too. Williams describes an earlier case in which an adoption agency that disclosed some of a child’s background, and withheld the rest in a misleading way, owed a duty of care. Williams also states that “the holding in Caritas is narrow,” and Safeco said of the same case: “That case is highly specialized.” My page on when silence becomes a misrepresentation covers disclosure duties in business deals.

Why Do Arm’s-Length Business Negotiations Rarely Support the Claim?

Minnesota appellate decisions have refused to find a duty of care between sophisticated businesses negotiating against each other, leaving the injured party to sue in contract or for fraud. In Safeco Insurance Co. of America v. Dain Bosworth Inc., 531 N.W.2d 867 (Minn. App. 1995), a bond underwriter sought a credit enhancer for a refinancing, and the court held: “We conclude, based on the undisputed facts of this case, that Dain did not owe a duty to Safeco beyond honesty.”

The court’s reason was the nature of the deal: “Because Dain was selling a deal to Safeco, and not supplying information for the guidance of Safeco, and because they were sophisticated equals negotiating a commercial transaction, Dain did not owe Safeco a duty for purposes of a negligent misrepresentation tort threshold.” It added that “It would be unreasonable to impose a duty whenever a party gives any information to another party.” In Smith v. Woodwind Homes, Inc., 605 N.W.2d 418 (Minn. App. 2000), the court applied the same rule to a bank and a closing company that were both experienced in real estate closings.

The Minnesota Supreme Court has not decided the commercial question itself. Williams states: “Recently, we declined to decide whether a negligent misrepresentation claim can be brought by a party to an arm’s-length commercial transaction.” It then cited the court of appeals decisions and explained the reasoning of other states: “The underlying reasoning is that sophisticated parties negotiating a commercial transaction are entitled to legal protection only for intentional, fraudulent misconduct.” When the other side of a deal misled you on purpose, a fraudulent misrepresentation claim is the usual route.

Under Minn. Stat. § 80A.76(b), a person who sells a security “by means of an untrue statement of a material fact” is liable to a purchaser who did not know of it, unless the seller proves “that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission.” Franchise sales are addressed by Minn. Stat. § 80C.13, subd. 2, and Minn. Stat. § 80C.17.

What Makes Reliance on a Statement Justifiable?

Reliance is judged against what you knew, what you could have checked, and what your own documents said. In Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009), the Minnesota Supreme Court judged reliance on a fraud claim by “the aggrieved party’s intelligence, experience, and opportunity to investigate the facts at issue.”

Due diligence, meaning your own investigation before a deal, protects you from a careless statement, but it can also defeat the claim when it shows you relied on what you found rather than on what you were told. Three Minnesota decisions show how a business’s own conduct can undercut this element:

1. Your own testing. In Valspar, a truck-parts maker tested a paint supplier’s products for three days before signing. The court held that “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.”
2. Your own analysts. Safeco was decided on duty, but the court added, “Assuming for the sake of argument that Safeco could get to the issue of reliance,” that “Safeco had its own surety bond credit analysts who investigated the transaction,” conducted its own underwriting analysis, and had an outside appraisal.
3. Your own contract. In Midland National Bank of Minneapolis v. Perranoski, 299 N.W.2d 404 (Minn. 1980), investors signed a partnership agreement disclosing their personal liability. On their fraud claims, the court held: “A jury could not reasonably find that third-party plaintiffs were justified in relying on oral representations contradicting the partnership agreement.”

Valspar and Perranoski decided fraud claims, and negligent misrepresentation carries the same justifiable-reliance element. My page on justifiable reliance covers the standard in more detail.

How Does Negligent Misrepresentation Differ From Fraud in Minnesota?

The difference is the speaker’s state of mind: fraud requires dishonesty, and negligent misrepresentation requires only carelessness measured against an ordinary person in the speaker’s position. Florenzano explains: “Fraudulent intent is, in essence, dishonesty or bad faith.” The court continued: “Fraudulent intent is also present when a misrepresenter speaks positively 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.”

That difference changes four things for a business deciding which claim to bring or defend:

1. Who can be sued. Fraud needs no special relationship. Negligent misrepresentation needs a duty of care, as the sections above explain.
2. Comparative fault. Florenzano held that comparative fault applies to negligent misrepresentation and stated: “Without question, principles of comparative negligence would not apply to an intentional tort; we have never so applied them.” The court limited its characterization of the claim to the case before it: “We hold, therefore, that, on the facts of this case, the only basis for liability was negligent misrepresentation.” Its reason was the agent relationship, because the same statements from “a stranger off the street or the next-door neighbor” would have been only free advice. In Valspar, the court stated fraud’s knowledge element as a representation “made with knowledge of the falsity of the representation or made without knowing whether it was true or false.”
3. Sales of goods. Minn. Stat. § 604.101, subd. 4 bars a goods buyer’s misrepresentation claim against the seller “unless the misrepresentation was made intentionally or recklessly.”
4. Pleading. Both claims must be pleaded with particularity under Minn. R. Civ. P. 9.02, as the pleading section below explains.

My page comparing fraudulent and negligent misrepresentation walks through the proof for each.

How Does Minnesota’s Economic Loss Statute Limit Claims About Goods?

A business that bought or leased goods generally cannot sue the seller for negligent misrepresentation about those goods. Minn. Stat. § 604.101, subd. 4 provides: “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.”

In Valspar, the Minnesota Supreme Court applied that text to a paint supply contract and 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.” Four limits on the statute’s reach decide whether it applies to you:

1. Goods only. Under subdivision 1, “goods” “means tangible personal property, regardless of whether that property is incorporated into or becomes a component of some different property.” A statement about services or real estate is not a statement about goods under that definition.
2. No personal injury. Subdivision 2 provides: “This section does not apply to claims for injury to the person.”
3. Privity does not matter. The statute applies “regardless of whether the seller and the buyer were in privity regarding the sale or lease of the goods.”
4. Sale dates. Under subdivision 6, the section governs claims “if the sale or lease that caused the seller to be a seller and the sale or lease that caused the buyer to be a buyer both occurred on or after August 1, 2000.”

A buyer barred from the negligence claim may still have a warranty claim. Under Minn. Stat. § 336.2-313(1)(a), “Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.” Subsection (2) excludes “an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods.”

The warranty route has its own steps. Under Minn. Stat. § 336.2-607(3)(a), after accepting goods, “the buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy.” The warranty claim also has its own filing deadline and accrual rule. Under Minn. Stat. § 336.2-725(2), a cause of action accrues “when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach,” and “A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.” Subsection (1) provides: “By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it.” I suggest comparing any filing period in the sale contract with the current text of subsection (1). The same section also provides: “The limitations in this section do not apply to actions for the breach of any contract for sale of a grain storage structure or other goods that are incorporated into an improvement to real property, except equipment and machinery. These actions are subject only to the statute of limitations set forth in section 541.051.” The sale contract may also limit remedies: under Minn. Stat. § 336.2-719(3), “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.” In Valspar, the buyer’s warranty claim also failed because it did not give the written notice its contract required. My page on the economic loss doctrine covers the statute’s effect on fraud claims, and sales of merchandise can also raise claims under the Minnesota Consumer Fraud Act.

Is There Negligent Misrepresentation in Real Estate Sales?

Yes. A buyer misled by a careless statement from a seller or a real estate agent can bring the claim, and Minnesota’s seller disclosure statute says so expressly. Minn. Stat. § 513.57, subd. 3 provides: “Nothing in sections 513.52 to 513.60 precludes liability for an action based on fraud, negligent misrepresentation, or other actions allowed by law.” The elements are the same four described above, so the buyer still has to show the seller or agent owed a duty of care and that relying on the statement was justified. The § 604.101 bar on goods buyers does not reach a house, because the statute defines goods as tangible personal property.

The statutes also impose disclosure duties of their own:

1. The seller. Under Minn. Stat. § 513.55, subd. 1(a), “Before signing an agreement to sell or transfer residential real property, the seller shall make a written disclosure to the prospective buyer.” It “must include all material facts of which the seller is aware that could adversely and significantly affect” an ordinary buyer’s use and enjoyment of the property or any intended use the seller knows about. Under § 513.57, subd. 2, “A seller who fails to make a disclosure as required by sections 513.52 to 513.60 and was aware of material facts pertaining to the real property is liable to the prospective buyer,” and “An action under this subdivision must be commenced within two years after the date on which the prospective buyer closed the purchase or transfer of the real property.” Check the current text of § 513.57 before relying on that period.
2. The seller’s protection for careful relaying. Subdivision 1 of § 513.57 protects a seller from “any error, inaccuracy, or omission” in the disclosure that “was not within the personal knowledge of the seller, or was based entirely on information provided by other persons as specified in section 513.56, subdivision 3, and ordinary care was exercised in transmitting the information,” unless the buyer and seller agree otherwise in writing.
3. The agent. Under Minn. Stat. § 82.68, subd. 3(a), “A licensee shall disclose to a prospective purchaser all material facts of which the licensee is aware, which could adversely and significantly affect an ordinary purchaser’s use or enjoyment of the property, or any intended use of the property of which the licensee is aware.”

A buyer’s inspection matters here the same way a business’s own testing mattered in Valspar. Under Minn. Stat. § 513.56, subd. 3(a), a seller need not disclose information contained in a written report by a qualified third party that was given to the buyer. Paragraph (b) adds: “A seller shall disclose to the prospective buyer material facts known by the seller that contradict any information included in a written report under paragraph (a) if a copy of the report is provided to the seller.” If you are buying, I suggest keeping the disclosure statement, the listing materials, and the inspection report together, because they show what you were told and what you could have checked.

How Does Comparative Fault Affect a Negligent Misrepresentation Recovery?

A business that was careless in relying on a statement has its damages reduced by its share of the fault, and it recovers nothing if its share is greater than the defendant’s. Under Minn. Stat. § 604.01, subd. 1, contributory fault does not bar recovery “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.”

Florenzano applied the Comparative Negligence Act in effect when the client’s claim accrued, an earlier version of the statute. It held: “We hold that the principles of comparative responsibility apply to negligent misrepresentation and that the trial court appropriately applied those principles in this case.” The defendants had offered evidence that the client “was negligent in exercising her choice of options,” and the jury found her 62.5% negligent. The Minnesota Supreme Court reinstated the trial court’s judgment for the agent, Frederick Olson, and Bankers Life Company, for which he was an insurance agent.

Subdivision 1a defines fault to include conduct that is “in any measure negligent or reckless toward the person or property of the actor or others.” For a defendant, the plaintiff’s own carelessness is a defense to plead and prove. For a plaintiff, the record of what you checked, and why you could not check more, is the answer to it.

What Damages, Rescission, and Punitive Damages Are Available?

Minnesota measures misrepresentation damages by what the business lost, not by what it expected to gain. In B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180 (Minn. 1988), the Minnesota Supreme 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.”

The court defined that loss: “In other words, the damages are 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.” It added: “In this state we do not subscribe to the “benefit-of-the-bargain” rule.” Goodrich was an intentional misrepresentation case. It allowed recovery of a lost business’s value because the out-of-pocket rule would have left the dealer with nothing.

The measure follows what the false statement changed. In one matter, I explained to a business suing its insurance agent that the claim does not pay back the whole uncovered loss. It pays the difference between what the right policy would have paid and what the business’s actual policy paid. My page on calculating actual damages covers the out-of-pocket rule in more depth.

A business that signed a contract because of a false statement may ask the court to undo the contract instead, a remedy called rescission, and to get back what it paid. Rescission does not require proof that the speaker meant to deceive. In Magnuson v. Bouck, 178 Minn. 238 (Minn. 1929), the sellers of land sued the buyers for the unpaid purchase price. The buyers defended by seeking rescission, and “they asked that they recover the amount which they had paid.” The Minnesota Supreme Court stated: “Rescission may be granted for a misrepresentation innocently made.” In Proulx v. Hirsch Bros. Inc., 279 Minn. 157, 155 N.W.2d 907 (Minn. 1968), the court described Magnuson this way: “In that case an innocent misrepresentation was said to be a valid basis for the remedy of rescission.” Proulx also marks a limit: “A representation of intention as to future acts or events which has not been falsely made with the purpose to deceive is not a sufficient ground upon which to predicate a charge of fraud, nor is it a sufficient basis for establishing the right to rescission of a contract induced by the representation, even though the act or event did not occur as represented.”

Punitive damages are a separate question with a higher bar. Under Minn. Stat. § 549.20, subd. 1(a), “Punitive damages shall be allowed in civil actions only upon clear and convincing evidence that the acts of the defendant show deliberate disregard for the rights or safety of others.” Paragraph (b) requires that the defendant “has knowledge of facts or intentionally disregards facts that create a high probability of injury to the rights or safety of others” and then deliberately proceeds to act in conscious or intentional disregard of, or with indifference to, that high probability. Negligent misrepresentation rests on a failure to use reasonable care, so proof of that claim alone does not show the knowing disregard paragraph (b) describes. Punitive damages also cannot be requested at the start of a lawsuit: under Minn. Stat. § 549.191, “Upon commencement of a civil action, the complaint must not seek punitive damages.” The plaintiff must later move to amend with affidavits, and the court grants the motion only if it “finds prima facie evidence in support of the motion.”

How Must the Claim Be Pleaded, and What Is the Statute of Limitations?

A negligent misrepresentation complaint must state the facts behind each element with particularity, and it must be filed before the limitation period runs. 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.”

Hardin County applied that rule to this claim: “We have said in the past that negligent misrepresentation constitutes fraud.” It then explained the test: “A party pleads the “ultimate facts” of a fraud claim when it pleads facts underlying each element of the fraud claim.” The court reversed a dismissal because the banks had pleaded who prepared the appraisal, what it overstated, that it was designed for their reliance, that they bought the bonds relying on it, and their loss. My page on pleading fraud with particularity covers the rule’s other applications.

The statute of limitations for negligent misrepresentation in Minnesota comes from Minn. Stat. § 541.05, subd. 1, whose opening line provides: “Except where the Uniform Commercial Code otherwise prescribes, the following actions shall be commenced within six years.” Check the current text of § 541.05 before relying on that period. In Bonhiver, the Minnesota Supreme Court applied clause (5) of that subdivision to the claim against the accountants. That clause covers actions “for criminal conversation, or for any other injury to the person or rights of another, not arising on contract, and not hereinafter enumerated.” The court held that the claim had accrued once “All of the negligent acts chargeable to Schwartz, Frumm had been committed and damage to American Allied had occurred.” For claims “for relief on the ground of fraud,” clause (6) of the same subdivision provides that “the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” I suggest recording the date of each false statement and the date the business first lost money because of it. My page on the deadline for fraud claims in Minnesota explains how the period runs.

Checking a Negligent Misrepresentation Claim Before You Act

Because the duty question can end the claim before anyone weighs the evidence, I suggest working through these questions before sending a demand or answering one:

1. What was the relationship? A professional relationship, certain fiduciary relationships, or a special legal relationship in which one party has superior knowledge or expertise can support a duty. In an arm’s-length negotiation between experienced businesses, Minnesota courts have pointed the injured party to contract or fraud instead. A securities sale or a franchise sale may also carry a statutory claim under § 80A.76(b) or §§ 80C.13 and 80C.17.
2. Was the statement made by the seller about goods you bought or leased? If so, and both sales occurred on or after August 1, 2000, § 604.101 bars the negligence claim against the seller unless the misrepresentation was made intentionally or recklessly. Warranty or fraud is the route. Section 336.2-725 sets the warranty claim’s accrual rule and lets the sale contract shorten its filing period only as far as subsection (1) allows. Its limitations do not apply to goods, other than equipment and machinery, that are incorporated into an improvement to real property; section 541.051 governs those claims.
3. What did you check, and what did your contract say? Your own investigation and a contrary written term can defeat reliance, and your own carelessness reduces the recovery under § 604.01.
4. What did the statement cost you? Build the number from what you lost, not what you expected to gain.

In one matter, I sent the other side a settlement demand letter with the draft complaint attached before filing, so it could see the claim as pleaded. I handle these disputes as part of my business tort practice. If you would like me to analyze whether a statement your business relied on supports a negligent misrepresentation claim, or how to defend one, email [email protected] with a brief description of the situation.