Punitive Damages for Fraud in Minnesota

When does fraud justify punitive damages in Minnesota?

Fraud justifies punitive damages in Minnesota when clear and convincing evidence shows 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 deliberately went ahead anyway. Proving the fraud is the first step. The punitive standard is a second, higher one.

Under Minn. Stat. § 549.20, subd. 1, 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.” The statute defines that phrase. A defendant acts with deliberate disregard “if 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 does one of two things:

• “deliberately proceeds to act in conscious or intentional disregard of the high degree of probability of injury to the rights or safety of others”; or
• “deliberately proceeds to act with indifference to the high probability of injury to the rights or safety of others.”

The test looks at what the defendant knew about the risk to your rights and what it chose to do next. Older Minnesota decisions quote the statute’s earlier phrase, “willful indifference,” so a case from before the current wording should be read against today’s text.

Minnesota courts have upheld punitive damages for fraud. In Vikse v. Flaby, 316 N.W.2d 276 (Minn. 1982), a man visited the homes of Minnesota residents and persuaded them to lend money to an Arizona land development company in exchange for its promissory notes. The jury found the defendants had defrauded them. It awarded $15,000 and $3,000 in general damages and $50,000 in punitive damages to each group of plaintiffs. After the plaintiffs consented to reduce each punitive award by $25,000, the Minnesota Supreme Court affirmed.

The fraud claim itself has its own elements and its own burden of proof, covered in the elements of a Minnesota fraud claim and the burden of proof for fraud.

Why is a breach of contract not enough for punitive damages?

A broken contract, even a deliberate or malicious breach, does not support punitive damages in Minnesota unless the conduct is also an independent tort, such as fraud. In a dispute over a business deal, the fraud claim has to succeed on its own for punitive damages to be available.

The Minnesota Supreme Court applied that rule in Barr/Nelson, Inc. v. Tonto’s, Inc., 336 N.W.2d 46 (Minn. 1983). A restaurant owner’s building contractor defaulted, and the owner sued the contractor’s surety. The jury found that the surety had not committed fraud but had breached its covenant of good faith, and it assessed $500,000 in punitive damages for willful and malicious conduct. The court reversed the punitive award: “The jury found that Balboa was not liable in fraud; therefore, punitive damages are not available on this ground.” It added: “Unless the willful and malicious conduct constitutes an independent tort, Minnesota law does not permit recovery of punitive damages.”

Two years later, in Jacobs v. Farmland Mutual Insurance Co., 377 N.W.2d 441 (Minn. 1985), the court restated the rule: “Even if a contract is breached maliciously, punitive damages will not lie unless the maliciousness constitutes an independent tort.”

For a business whose deal went bad, the question is whether the facts show a fraud that is separate from the other side’s failure to perform. A seller who misstated revenue to close a sale and a seller who missed a delivery date present different claims, even if both breached the contract. When the deal involved goods, Minnesota’s economic loss statute adds a limit on fraud claims, discussed in the FAQ below and in the economic loss doctrine and fraud claims.

How does choosing rescission instead of damages affect punitive damages?

Punitive damages in Minnesota generally require an award of actual or compensatory damages. A party who undoes a fraudulent transaction by rescission, without proving damages, may lose the chance at punitive damages, as the plaintiffs did in Jacobs.

In Jacobs, an insurance adjuster obtained a release of a family’s wrongful-death claim for $4,000. The jury set the release aside and awarded $100,000 in punitive damages. The Minnesota Supreme Court reversed the punitive award. It explained that “Our case law suggests that punitive damages may be permitted only where the plaintiff is found entitled to actual or compensatory damages,” with an exception for defamation per se.

The remedy the plaintiffs chose decided the case. The court observed that “Plaintiffs elected not to affirm the contract and sue in deceit for damages.” It held that “since plaintiffs have not established the requisite kind of actual or compensatory damages, punitive damages are not recoverable.” It also said “it is not unfair here to require plaintiffs to abide by the consequences of their choice of remedies.”

The court reserved one situation. It noted that some courts allow punitive damages in rescission cases involving bargain transactions where restitution-type expenses are recovered, then said: “This is not, however, our case here.” A Minnesota buyer who rescinds a business purchase and recovers money spent because of the fraud presents a question Jacobs did not decide.

A defrauded buyer can ask to undo the deal, or can keep it and sue for the loss. I suggest deciding that question with punitive damages in view, because in Jacobs the choice of rescission was the reason the award was reversed. For how the two remedies differ, see restitution versus damages and how actual fraud damages are measured.

How do you add a punitive damages claim to a Minnesota lawsuit?

In Minnesota state court, a plaintiff files the lawsuit without a punitive damages claim, then moves to amend the complaint. The motion must be supported by affidavits, and the court grants it only if the evidence makes a prima facie case under the clear and convincing standard.

Under Minn. Stat. § 549.191, “Upon commencement of a civil action, the complaint must not seek punitive damages. After filing the suit a party may make a motion to amend the pleadings to claim punitive damages.” The motion “must allege the applicable legal basis under section 549.20 or other law for awarding punitive damages in the action and must be accompanied by one or more affidavits showing the factual basis for the claim.” Then, “if the court finds prima facie evidence in support of the motion, the court shall grant the moving party permission to amend the pleadings to claim punitive damages.”

The Minnesota Court of Appeals explained the screening standard in Swanlund v. Shimano Industrial Corp., 459 N.W.2d 151 (Minn. App. 1990), a product-liability case. A court “may not allow an amendment where the motion and supporting affidavits ‘do not reasonably allow a conclusion that clear and convincing evidence will establish the defendant acted with willful indifference * * *.’” The court added: “We stress that this determination does not require the trial court to make credibility determinations of any kind, and therefore does not denigrate the role of the jury.” In Leiendecker v. Asian Women United of Minnesota, 895 N.W.2d 623 (Minn. 2017), an anti-SLAPP case, the Minnesota Supreme Court described the punitive damages showing as producing evidence “much like a summary-judgment standard.”

Three procedural points follow from the statute and these cases:

1. The affidavits carry the motion. The court decides on the evidence submitted with the motion, so the affidavits and exhibits need to show facts about what the defendant knew and did, not only the conclusion that it acted deliberately.
2. A denial can be revisited. In Swanlund, the court said: “Should further discovery yield evidence justifying a punitive damages claim, the Swanlunds are free to seek amendment.” A scheduling order under Minn. Gen. R. Prac. 111.03 may set “Deadlines for bringing nondispositive or dispositive motions,” and under Rule 111.04, “Except in unusual circumstances, a motion to extend deadlines under a scheduling order shall be made before the expiration of the deadline.”
3. The amendment relates back. “For purposes of tolling the statute of limitations, pleadings amended under this section relate back to the time the action was commenced.”

The underlying fraud claim must still be filed on time. Under Minn. Stat. § 541.05, subd. 1, a fraud claim “shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud.” The Minnesota Supreme Court measured that discovery by “when the facts constituting fraud were discovered or, by reasonable diligence, should have been discovered,” in Toombs v. Daniels, 361 N.W.2d 801 (Minn. 1985). The period itself is covered in the deadline for a fraud claim, and the detail a fraud complaint must contain is covered in pleading fraud with particularity.

What decides the amount of a punitive damages award?

In Minnesota, the jury measures a punitive award by the factors listed in § 549.20, subd. 3, and the trial court must then review the award and make specific findings on those factors. The general statute sets no dollar cap.

Under Minn. Stat. § 549.20, subd. 3, an award “shall be measured by those factors which justly bear upon the purpose of punitive damages, including”:

• “the seriousness of hazard to the public arising from the defendant’s misconduct”;
• “the profitability of the misconduct to the defendant”;
• “the duration of the misconduct and any concealment of it”;
• “the degree of the defendant’s awareness of the hazard and of its excessiveness”;
• “the attitude and conduct of the defendant upon discovery of the misconduct”;
• “the number and level of employees involved in causing or concealing the misconduct”;
• “the financial condition of the defendant”; and
• “the total effect of other punishment likely to be imposed upon the defendant as a result of the misconduct, including compensatory and punitive damage awards to the plaintiff and other similarly situated persons, and the severity of any criminal penalty to which the defendant may be subject.”

Either side can ask for a separate proceeding. Under subd. 4, “the trier of fact shall, if requested by any of the parties, first determine whether compensatory damages are to be awarded.” Evidence of the defendant’s financial condition, and other evidence relevant only to punitive damages, “is not admissible in that proceeding.” The jury then decides “in a separate proceeding” whether to award punitive damages and how much.

After the verdict, subd. 5 requires the court to “specifically review the punitive damages award in light of the factors set forth in subdivision 3 and shall make specific findings with respect to them.” The appellate court reviews the award in light of the same factors. The statute also says: “Nothing in this section may be construed to restrict either court’s authority to limit punitive damages.”

How does the U.S. Constitution limit punitive damages for fraud?

The Due Process Clause bars a punitive award that is grossly excessive. The U.S. Supreme Court weighs the reprehensibility of the conduct, the ratio of punitive damages to the plaintiff’s harm, and comparable civil penalties.

The leading case involved fraud. In BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), a car buyer learned that his new BMW had been repainted before sale without disclosure. The jury found $4,000 in compensatory damages and $4 million in punitive damages. The Alabama Supreme Court reduced the punitive award to $2 million, which the U.S. Supreme Court noted “is 500 times the amount of his actual harm as determined by the jury.” The Court held the $2 million award grossly excessive. It also observed that “trickery and deceit” “are more reprehensible than negligence.”

In State Farm Mutual Automobile Insurance v. Campbell, 538 U.S. 408 (2003), an insurer’s bad-faith case from Utah, the Court declined to set a fixed ratio. It said that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” It added: “When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Among the reprehensibility factors, Campbell lists whether “the target of the conduct had financial vulnerability” and whether “the harm was the result of intentional malice, trickery, or deceit, or mere accident.”

Because Campbell measures the ratio against the compensatory award, the size of a Minnesota business’s provable loss shapes the realistic size of any punitive award.

When is a company liable for punitive damages for its employee’s fraud?

A Minnesota company is liable for punitive damages based on an employee’s or other agent’s act only if one of four conditions in § 549.20, subd. 2 is met. Liability for the employee’s compensatory damages does not by itself carry punitive damages with it.

Under Minn. Stat. § 549.20, subd. 2, “Punitive damages can properly be awarded against a master or principal because of an act done by an agent only if”:

1. “the principal authorized the doing and the manner of the act”;
2. “the agent was unfit and the principal deliberately disregarded a high probability that the agent was unfit”;
3. “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”; or
4. “the principal or a managerial agent of the principal, described in clause (3), ratified or approved the act while knowing of its character and probable consequences.”

When a salesperson misrepresents a product, the punitive question for the company turns on who authorized the statements, who knew about them, and whether a manager with policy authority approved them. A title alone does not answer the third condition; the agent must have had “authority to establish policy and make planning level decisions.” The fourth condition can arise after the fact, when the principal or a managerial agent later ratifies or approves the act knowing its character and probable consequences.

What other Minnesota laws add money to a fraud recovery?

Two Minnesota statutes can add recovery beyond common-law fraud damages: the private remedy for Consumer Fraud Act violations, which allows attorney fees, and the civil theft statute, which sets its own punitive damages. Each has limits that matter in a business dispute.

The Minnesota Consumer Fraud Act reaches deceptive conduct “with the intent that others rely thereon in connection with the sale of any merchandise,” under Minn. Stat. § 325F.69, subd. 1. Under Minn. Stat. § 8.31, subd. 3a, a person injured by a violation “may bring a civil action and recover damages, together with costs and disbursements, including costs of investigation and reasonable attorney’s fees.”

The Minnesota Supreme Court limited that private remedy in Ly v. Nystrom, 615 N.W.2d 302 (Minn. 2000). The seller of a restaurant misrepresented its revenue and profits to the buyer, and the trial court awarded the buyer common-law fraud damages. The court held that the statute “applies only to those claimants who demonstrate that their cause of action benefits the public.” It explained that the buyer “was defrauded in a single one-on-one transaction in which the fraudulent misrepresentation, while evincing reprehensible conduct, was made only to appellant.” A fraud in a private sale of a business can face the same obstacle.

When the fraud took the form of theft, Minn. Stat. § 604.14, subd. 1 makes “A person who steals personal property from another” liable “for its value when stolen plus punitive damages of either $50 or up to 100 percent of its value when stolen, whichever is greater.” The Minnesota Court of Appeals said “steals” in common usage “generally means that a person wrongfully and surreptitiously takes another person’s property for the purpose of keeping it or using it,” in TCI Business Capital, Inc. v. Five Star American Die Casting, LLC, 890 N.W.2d 423 (Minn. App. 2017). Under subd. 5, “The recovery of stolen property by a person does not affect liability under this section, other than liability for the value of the property.” That statute comes up in employee theft recovery.

What should a business accused of fraud do about a punitive damages claim?

A Minnesota business facing a threatened punitive claim can oppose the motion to amend, request the separate proceeding under § 549.20, subd. 4, and pay attention to how it responds to the accusation, because that response is itself a statutory factor.

1. Oppose the motion on the facts. In Hogenson v. Hogenson, 852 N.W.2d 266 (Minn. App. 2014), a dispute between brothers over family companies and property that involved conversion and trespass, not fraud, the Minnesota Court of Appeals affirmed denial of a motion to add punitive damages. The district court had found the conduct did not “rise to the level of conscious or intentional disregard contemplated by the punitive damages statute.” It noted that the conduct “took place after receiving the advice of his lawyer” and after three court orders denied the other brother’s motions to vacate an earlier judgment.
2. Request the separate proceeding. I suggest asking for it under subd. 4 if punitive damages are allowed into the case, because it keeps evidence of the company’s financial condition out of the trial on compensatory damages.
3. Respond to the accusation with the factors in mind. Subd. 3 lists “the attitude and conduct of the defendant upon discovery of the misconduct” and “the number and level of employees involved in causing or concealing the misconduct.” I suggest investigating the accusation, preserving documents, and correcting any misstatement you find, because those steps become part of the record a jury weighs under those factors.
4. Identify who knew. Under subd. 2, the company’s punitive exposure for an employee’s act depends on authorization, managerial involvement, ratification, or whether “the agent was unfit and the principal deliberately disregarded a high probability that the agent was unfit,” so the internal facts about who knew what decide much of the risk.

What should you weigh before seeking punitive damages for fraud?

Punitive damages for fraud in Minnesota require a fraud claim that succeeds on its own. They are allowed only upon clear and convincing evidence 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 deliberately went ahead. Minnesota case law suggests you also need actual or compensatory damages. In Minnesota state court, the claim is added by a motion to amend supported by affidavits. The amount then runs through the § 549.20 factors, the court’s own review, and the due process limits in Gore and Campbell. Before choosing between rescission and damages, or between a contract claim and a fraud claim, weigh how that choice affects whether punitive damages remain available. Related questions about fraud claims and remedies are collected on the business fraud and unfair competition practice page.

If you would like me to look at the facts of a business deal you believe was induced by fraud, or at a punitive damages claim made against your company, email [email protected] with a brief description of the situation.