A seller of a Minnesota business has no general duty to volunteer every fact. A seller who hides pending customer warranty claims can still face fraud claims and claims under the purchase agreement, and in a stock sale that counts as a sale of a security, a claim under the Minnesota Securities Act. No Minnesota statute requires a business seller to disclose warranty claims; the rules come from Minnesota court decisions and the contract. What makes warranty claims different from other liabilities is that, for a target that sells goods, their size depends on the target’s own customer terms under Minnesota’s version of Article 2 of the Uniform Commercial Code (“UCC”). This page is written for a company buying a closely held Minnesota business, and it is part of my Minnesota contracts practice materials.

When does a Minnesota seller have to disclose pending warranty claims?

A Minnesota seller has no general duty to disclose pending warranty claims, but special circumstances may create one, and the purchase agreement can impose a duty by contract. The Minnesota Supreme Court’s examples are a statement the hidden claims make misleading, special knowledge of facts the buyer cannot reach, and a confidential or fiduciary relation.

The rule comes from Klein v. First Edina National Bank, 196 N.W.2d 619 (Minn. 1972): “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.” The court gave three examples:

  1. “One who speaks must say enough to prevent his words from misleading the other party.”
  2. “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. “One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts.”

Warranty claims fit the second example closely, because the seller holds the complaint files, the return logs, and the customer correspondence, and a buyer sees them only if the seller produces them. The first example applies as soon as the seller answers a diligence question about product quality or returns. The purchase agreement adds a separate duty: a representation that no warranty claims are pending, other than those on a schedule, is a promise the buyer can enforce on its own terms. My page on the duty to disclose in contracts covers the common-law rule in more depth.

Home sales follow a separate statute. Minn. Stat. § 513.55, subd. 1 requires that “Before signing an agreement to sell or transfer residential real property, the seller shall make a written disclosure to the prospective buyer,” and § 513.52, subd. 4 defines that property as one that “means property occupied as, or intended to be occupied as, a single-family residence,” so it does not govern the purchase of a business.

What counts as a pending warranty claim in a business sale?

A pending warranty claim is a customer’s assertion that goods or work the target sold breached a warranty, and it can exist long before any lawsuit. When the target sold goods, Minnesota’s UCC creates warranties from the target’s own statements that relate to the goods and implies one in a contract for their sale, and the customer’s notice of breach is the step that keeps the claim alive.

For a target that sells goods, three Minnesota UCC rules define the universe a buyer should ask about:

  • Express warranties. Under Minn. Stat. § 336.2-313, “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.” The same section provides that a seller creates an express warranty without formal words such as warrant or guarantee, and without “a specific intention to make a warranty,” but “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 does not create a warranty.” A spec sheet or a sales email can contain an affirmation of fact or promise about the goods.
  • Implied warranty of merchantability. Under Minn. Stat. § 336.2-314, “Unless excluded or modified (section 336.2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.”
  • The customer’s notice. Under Minn. Stat. § 336.2-607, once a customer accepts 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.” In practice, that notice is a letter, an email, or a return request, and it sits in the target’s customer files, not on any court docket.

For a buyer, the point is that a court search finds only claims that became lawsuits. The notices, open return requests, and credit demands are the earlier stage, and the purchase agreement should reach them by definition. My page on express and implied warranties explains how each warranty arises.

How does a buyer size the exposure from pending warranty claims?

A buyer sizes pending warranty claims by reading the target’s customer terms, because, for sales of goods, Minnesota’s UCC lets a seller limit warranty remedies and exclude implied warranties, within limits. The remedy clause, the disclaimer, the customer’s notice, and federal consumer law together set what each claim could cost.

Remedy limits. Minn. Stat. § 336.2-719 lets a sales contract “limit or alter the measure of damages recoverable under this article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts.” That limit binds the customer only if it is exclusive: resort to a remedy as provided is optional “unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.” An exclusive repair-or-replace clause can cap a claim at the cost of the fix. The cap has two limits. “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter,” so a repair remedy that fails of its essential purpose leaves the customer the other remedies the chapter provides. And “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.” My page on the sole and exclusive remedy clause covers how those clauses are drafted.

Disclaimers. Under Minn. Stat. § 336.2-316, “to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous.” A disclaimer buried in small print may fail that test. That test applies “Subject to subsection (3),” which provides that “unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like” as is or with all faults “or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.” Minnesota adds a condition for a consumer sale. Minn. Stat. § 325G.17, subd. 2 defines a consumer sale as “a sale of new goods, or as regards an express warranty, any goods, purchased primarily for personal, family, or household purposes, and not for agricultural or business purposes.” No consumer sale on an as is or with all faults basis “shall be effective to disclaim the implied warranty of merchantability, or, where applicable, the implied warranty of fitness, unless a conspicuous writing clearly informs the buyer, prior to the sale, in simple and concise language” that the goods are sold on that basis and that “the entire risk as to the quality and performance of the goods is with the buyer,” under Minn. Stat. § 325G.18, subd. 2. A target that gave a written warranty on a consumer product, defined below, also faces a federal bar. Under 15 U.S.C. § 2308(a), “No supplier may disclaim or modify (except as provided in subsection (b)) any implied warranty to a consumer with respect to such consumer product if (1) such supplier makes any written warranty to the consumer with respect to such consumer Product, or (2) at the time of sale, or within 90 days thereafter, such supplier enters into a service contract with the consumer which applies to such consumer product.” Subsection (b), which applies “For purposes of this chapter (other than section 2304(a)(2) of this title),” allows only a limit on duration “to the duration of a written warranty of reasonable duration, if such limitation is conscionable and is set forth in clear and unmistakable language and prominently displayed on the face of the warranty.” Under 15 U.S.C. § 2304(e), a warranty designated “full” is “deemed to incorporate at least the minimum requirements of this section,” and § 2304(a)(2) provides that “notwithstanding section 2308(b) of this title, such warrantor may not impose any limitation on the duration of any implied warranty on the product.” Under subsection (c), “A disclaimer, modification, or limitation made in violation of this section shall be ineffective for purposes of this chapter and State law.” Minnesota adds a parallel rule. Minn. Stat. § 325G.19, subd. 1 provides that “No express warranty arising out of a consumer sale of new goods shall disclaim implied warranties of merchantability, or, where applicable, of fitness.”

Notice terms. In Valspar Refinish, Inc. v. Gaylord’s, Inc., 764 N.W.2d 359 (Minn. 2009), a paint supply contract’s express warranty required written notice of nonconformity. The customer complained orally and by an email the court found lacked sufficient detail, and the Minnesota Supreme Court held that its “breach of contract, revocation of acceptance, and breach of warranty claims are barred as a matter of law because Gaylord’s failed to provide the written notice that the contract required as a precondition to terminating the agreement.” A claim that missed the target’s own notice terms may be worth less than its demand letter says.

Consumer products. If the target’s goods are consumer products, the federal Magnuson-Moss Warranty Act adds fee exposure. Under 15 U.S.C. § 2301(1), a consumer product is “any tangible personal property which is distributed in commerce and which is normally used for personal, family, or household purposes (including any such property intended to be attached to or installed in any real property without regard to whether it is so attached or installed).” A consumer includes “a buyer (other than for purposes of resale) of any consumer product” and “any person to whom such product is transferred during the duration of an implied or written warranty (or service contract) applicable to the product,” under § 2301(3). Under 15 U.S.C. § 2310(d), “a consumer who is damaged by the failure of a supplier, warrantor, or service contractor to comply with any obligation under this chapter, or under a written warranty, implied warranty, or service contract, may bring suit for damages and other legal and equitable relief,” and a consumer who finally prevails “may be allowed by the court to recover as part of the judgment” costs and expenses, including “attorneys’ fees based on actual time expended,” that the court determines were reasonably incurred, unless the court in its discretion finds a fee award inappropriate. Subsection (e) bars most of those suits “unless the person obligated under the warranty or service contract is afforded a reasonable opportunity to cure such failure to comply.”

What claims can a buyer bring when the seller hid warranty claims?

A buyer can bring a fraud claim, a claim for breach of the purchase agreement’s warranty representation, and, when the deal was a sale of a security, a claim under the Minnesota Securities Act. Each claim has different elements, and the buyer can plead them together.

Fraud requires five elements, set out by the Minnesota Supreme Court in Hoyt Properties, Inc. v. Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 2007). The first is “a false representation by a party of a past or existing material fact susceptible of knowledge.” The others are knowledge of the falsity (or speaking without knowing whether it was true), intent to induce reliance, reliance that caused the buyer to act, and resulting financial loss. A seller’s statement that warranty returns are within normal levels, made while it held an open claim it knew to be large, can be a statement of existing fact under the first element.

A contract claim is simpler in one respect: the buyer proves the representation, its falsity, and the loss, on the terms the parties wrote. The agreement’s survival period, indemnity cap, basket, and notice terms then shape what the buyer recovers.

In a stock purchase, Minn. Stat. § 80A.68 makes it unlawful “to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make a statement made, in the light of the circumstances under which it is made, not misleading.” The buyer’s civil claim is in Minn. Stat. § 80A.76(b). A person who sells a security “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” is liable to the purchaser, “the purchaser not knowing the untruth or omission and the seller not sustaining the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission,” under that subsection. Minn. Stat. § 80A.41 excludes from the definition of a security the equity of a closely held entity with “not more than 35 holders” when “100 percent of the equity interest of such entity is sold as a means to effect the sale of the business of the entity,” the deal was negotiated on behalf of all purchasers, and all purchasers had access to inside information before closing. Where the act applies, § 80A.76 states that “The rights and remedies provided by this chapter are in addition to any other rights or remedies that may exist.” My page on a seller who hides a pending lawsuit covers the act’s remedies and who is personally liable.

How does due diligence affect a buyer’s fraud claim?

A buyer has no duty to investigate before relying on a seller’s statement, but an investigation the buyer does conduct can be used against it. Both rules come from the Minnesota Supreme Court, and the difference turns on what the buyer examined.

In Hoyt, the court held that a fraud plaintiff must show “both actual and reasonable reliance,” and that “The listener 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.” Steve Hoyt, an attorney who owned and operated the plaintiff company, had legal training and business experience, but those did not make the company’s reliance unreasonable as a matter of law; that question went back for trial.

In Valspar, the result went the other way. The court said reliance in fraud cases is generally judged by “the aggrieved party’s intelligence, experience, and opportunity to investigate the facts at issue,” and “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.” The parties there were “sophisticated business equals operating in a commercial setting,” and the customer had tested the very paint products the statements concerned. The court also rested the result on a second ground: the statements were predictions that problems would be fixed, not statements of existing fact.

A buyer reviewing a sample of warranty files has examined only the files it was given. I suggest that a buyer keep a written record of what the seller produced and of the seller’s written answers about claims. The gap between the two is the evidence of what the buyer could not see. My page on the anti-sandbagging clause covers the contract term that ties recovery to what the buyer knew before closing.

When do merger and no-reliance clauses fail to bar a fraud claim?

Under Minnesota law, a court may find reliance on an oral representation unjustifiable as a matter of law, despite a merger or no-reliance clause, only if the written contract provision “explicitly stated a fact completely contradictory to the claimed misrepresentation”; otherwise, “the question of reliance is one for a factfinder.” The Minnesota Court of Appeals applied that rule to a fraudulent-omission claim in 2020.

In Great Plains Educational Foundation, Inc. v. Student Loan Finance Corp., 954 N.W.2d 844 (Minn. App. 2020), the court’s first syllabus point reads: “The presence of both a no-reliance and an integration clause in a settlement agreement does not as a matter of law bar a subsequent claim for fraudulent inducement of that settlement agreement based on alleged oral misrepresentations unless there are express terms in the settlement agreement that contradict the alleged oral misrepresentations.” Its reasoning rests on an older rule: “The Minnesota Supreme Court has long held that fraud cannot be waived by a contractual disclaimer.”

Great Plains involved a settlement agreement, and the plaintiff alleged that the other side misrepresented or left out its assets and liabilities during negotiations. The case came up on a motion to dismiss, so the court accepted the complaint’s facts as true and sent the case back for further proceedings. For a seller, a merger clause is no substitute for a complete warranty-claims schedule. For a buyer, the clause does not by itself defeat a claim that the seller hid warranty claims.

Who pays pending warranty claims after the sale closes?

Who pays depends on the deal’s structure. In a stock purchase, the target company stays the warrantor, and the buyer now owns it. When a Minnesota corporation sells all or substantially all of its property and assets, the buyer takes on the seller’s warranty obligations only as the contract or a statute provides.

Minn. Stat. § 302A.661, subd. 4 states the asset-sale rule: “The transferee is liable for the debts, obligations, and liabilities of the transferor only to the extent provided in the contract or agreement between the transferee and the transferor or to the extent provided by this chapter or other statutes of this state.” It adds that “The transferee shall not be liable solely because it is deemed to be a continuation of the transferor.” That subdivision governs corporations under chapter 302A; an LLC seller’s asset sale is outside it.

The structure changes who is hurt by hidden claims. A stock buyer inherits the warranty costs through its ownership. An asset buyer can leave pre-closing claims with the seller under subdivision 4. A buyer that keeps the customers may still face business pressure to honor warranties it never assumed, and an agreement that assumes all liabilities of the business takes the claims on by contract. My page on transferring warranty obligations in an asset sale covers the assignment mechanics.

Buyers of a home builder or remodeler face a statutory layer. Minn. Stat. § 327A.02, subd. 1 provides that “In every sale of a completed dwelling, and in every contract for the sale of a dwelling to be completed, the vendor shall warrant to the vendee that” the dwelling will be free of the listed defects. Subdivision 2a provides that “The statutory warranties provided in this section are not affected by the dissolution of a vendor or home improvement contractor that is a corporation or limited liability company.” Under subdivision 4, “The vendee or owner must allow an inspection for purposes of the preparation of an offer to repair the alleged loss or damage under subdivision 5,” so a homeowner’s claim can sit in an inspection and repair process, with written notices and written repair offers, before any lawsuit. My page on Minnesota home improvement warranty law covers that statute.

What remedies can a buyer choose after finding hidden warranty claims?

A buyer who was defrauded into the purchase can either undo the deal or keep it and sue for damages, but not both, unless the purchase falls under the sale-of-goods rules of Article 2 of the Uniform Commercial Code. In Great Plains, the Court of Appeals restated that a party “who has been induced to enter a contract by fraudulent misrepresentations may elect to rescind the contract or sue for damages,” and that a party choosing rescission must undo the whole deal: “rescission of the contract must be in toto.” Article 2, which applies to “transactions in goods” and to a hybrid transaction where “the sale-of-goods aspects predominate,” Minn. Stat. § 336.2-102, sets a different rule: “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.” Minn. Stat. § 336.2-721.

  • Rescission unwinds the sale, returning the business to the seller and the price to the buyer. In Hemming v. Ald, Inc., 155 N.W.2d 384 (Minn. 1967), a sale of laundromat equipment falsely represented as new, the Minnesota Supreme Court said the right to rescind “may be lost where the buyer either affirms the transaction with knowledge of the fraud or, pertinent here, where the buyer fails to disaffirm the transaction within a reasonable time after discovery of the fraud.” My page on undoing a signed contract after fraud covers the steps.
  • Damages let the buyer keep the business and recover its loss, either through a fraud claim or through the purchase agreement’s indemnity for a breached warranty-claims representation.

Each claim carries its own time limit, and the purchase agreement may set a shorter survival period for the contract claim. I suggest that a buyer who finds hidden claims check the current statutes and the agreement’s survival and notice terms before choosing a remedy. The periods differ by claim, and the notice terms may require a specific form of written notice.

How should the purchase agreement handle known warranty claims?

A purchase agreement should handle known warranty claims by defining them, listing them, and assigning them. Each step turns a fact that could support a fraud claim into a written term both sides agreed to.

I suggest these terms:

  1. A definition of warranty claim that reaches written notices of breach, return and credit requests, and threatened claims, because a customer’s claim under § 336.2-607 begins with notice, not a lawsuit.
  2. A warranty-claims schedule listing each open claim by customer, product, amount demanded, and status. Attaching the target’s standard warranty terms lets the buyer size each claim under the remedy clause that governs it.
  3. An assumed-liabilities clause that says which warranty obligations the buyer takes on in an asset deal, since § 302A.661, subd. 4 makes the contract the measure for a corporate seller.
  4. A special indemnity for scheduled claims, outside the general cap and basket, and a survival period that matches how long the target’s warranties run.
  5. An escrow or holdback sized to the scheduled claims, so the buyer is not collecting from a seller who has spent the proceeds.
  6. A bring-down clause that repeats the warranty-claims representation at closing, so a claim received between signing and closing must be added to the schedule.

For a seller, a disclosed claim becomes a negotiated price or escrow term, while a hidden one can support rescission.

Is a customer complaint with no lawsuit a pending warranty claim?

It can be. Under Minn. Stat. § 336.2-607, a customer who has accepted goods must notify the seller of breach within a reasonable time after it discovers or should have discovered the breach, or be barred from any remedy, so a complaint letter can be the first step of a warranty claim. Whether the complaint falls within the purchase agreement’s warranty-claims representation turns on how the agreement defines a warranty claim, which is why I suggest a definition that covers written notices as well as lawsuits.

Can a buyer recover if the seller called warranty returns ordinary business?

It can, if the description misled the buyer. In Klein v. First Edina National Bank (Minn. 1972), the Minnesota Supreme Court stated that one who speaks must say enough to prevent his words from misleading the other party. A seller who describes its warranty experience as routine while leaving out a large open claim it knows about gives a partial answer, and the purchase agreement’s warranty representation may give the buyer a separate contract claim.

Does an as-is clause in the customer contracts make the warranty claims worthless?

No, not by itself. Under Minn. Stat. § 336.2-316, as is language excludes implied warranties unless the circumstances indicate otherwise, but it does not erase an express warranty the target gave, and the statute reads words creating a warranty and words limiting it as consistent wherever reasonable. In a consumer sale, Minn. Stat. § 325G.18 gives an as is clause no effect against the implied warranties unless a conspicuous writing clearly informed the buyer, before the sale, that the goods were sold as is and that the entire risk as to their quality and performance was with the buyer. Under 15 U.S.C. § 2308, a supplier that makes any written warranty to the consumer on a consumer product, or enters into a service contract on it at the time of sale or within the period after the sale that the statute sets, may not disclaim or modify the implied warranties. Subsection (b) does let it limit their duration to that of a written warranty of reasonable duration, if the limit is conscionable and set forth in clear and unmistakable language prominently displayed on the face of the warranty. That permission does not reach a supplier whose warranty is designated “full”: under 15 U.S.C. § 2304(a)(2) and (e), it “may not impose any limitation on the duration of any implied warranty on the product.” Separately, Minn. Stat. § 325G.19 provides that no express warranty arising out of a consumer sale of new goods shall disclaim implied warranties of merchantability or fitness. I suggest reading the clause, the customer’s contract, and the sales materials together before discounting the claim.

Should a seller disclose warranty claims it thinks are invalid?

I suggest listing them with the seller’s position on each, because the buyer will weigh the merits for itself and the seller’s opinion is not the buyer’s to rely on. A representation that lists some claims and leaves out the disputed ones is a partial answer, and in Klein v. First Edina National Bank (Minn. 1972), the Minnesota Supreme Court stated that one who speaks must say enough to prevent his words from misleading the other party.

Can a buyer keep the business and still sue over hidden warranty claims?

Yes. A party induced to enter a contract by fraudulent misrepresentations may elect to rescind the contract or sue for damages, as the Minnesota Court of Appeals restated in Great Plains Educational Foundation, Inc. v. Student Loan Finance Corp. (Minn. App. 2020). Keeping the business means choosing damages. In Hemming v. Ald, Inc. (Minn. 1967), a sale of goods, the Minnesota Supreme Court said the right to rescind may be lost where the buyer affirms the transaction with knowledge of the fraud or fails to disaffirm the transaction within a reasonable time after discovery of the fraud.

Do consumer warranty claims carry attorney fee exposure for the target?

They can, if the target’s goods are consumer products, which 15 U.S.C. § 2301 defines as tangible personal property normally used for personal, family, or household purposes, including any such property intended to be attached to or installed in any real property without regard to whether it is so attached or installed; a consumer includes a buyer other than for purposes of resale and a person to whom the product is transferred during the duration of an implied or written warranty or service contract applicable to it. Under the federal Magnuson-Moss Warranty Act, 15 U.S.C. § 2310(d), a consumer damaged by a failure to comply with a written or implied warranty may sue, and a consumer who finally prevails may be allowed costs and attorneys’ fees based on actual time expended that the court finds were reasonably incurred, unless the court finds a fee award inappropriate. Most of those suits require that the warrantor first get a reasonable opportunity to cure. I suggest that a buyer sizing consumer claims count that fee exposure as well as the price of the product, because the statute measures fees by actual time expended, not by the product’s price.

Next Steps for a Buyer

Pending warranty claims are a liability the seller can see and the buyer may not, which is why Minnesota’s special-knowledge rule from Klein and the purchase agreement’s representation both matter. I suggest that a buyer ask for the customer notices themselves, read the target’s remedy and disclaimer terms under Minnesota’s UCC for sales of goods, and settle the definition, schedule, and indemnity before signing. Those documents decide whether a hidden claim later becomes a contract claim, a fraud claim, or a cost the buyer absorbs. More on these agreements is in my Minnesota contracts practice materials. If you would like me to analyze a purchase agreement’s warranty representation and schedule, or warranty claims you learned of after closing, email [email protected] with a brief description.